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Tax & Accounting

2017Whole Ball of Tax

When you have to be right

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from Wolters Kluwer Tax & AccountingWhole Ball of Tax2017

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Welcome to the 2017 Whole Ball of Tax — your premier resource for tax season updates and expertise from Wolters Kluwer Tax & Accounting. Here, you’ll find a wide range of topical press releases and updated charts featuring analysis from our federal and state tax experts.

Check back often at CCHGroup.com/WBOT2017 for new content, updates and resources to help you through tax season and beyond!

Experts 1–3

1. Tax Experts 1–22. About Wolters Kluwer Tax & Accounting 3

Tax News 4–46

3. What’s New for the 2016 Tax Return Filing Season? 4–54. Avoiding Taxpayer ID Theft and Tax Scams 6–85. Claim Those Tax Deductions Before They Go Away 9–116. Tax Changes Related to Health Care Impacting Tax Returns 12–137. Where to Retire? Finding a Tax‑friendly State to Call Home 14–288. Online Shopping Sales and Use Taxes Update 29–319. Business Traveler Tax Planning Tips 32–3310. Tax Rules for Charitable Contributions 34–3511. BEPS Update: The Rise of Country‑by‑Country Reporting 3612. Tax Implications of Brexit 37–3813. Guidance for Estate and Gift Tax Planning 39–4114. Ways to Reduce Taxable Income 42–4415. A Comparison of the Trump and Ways & Means Committee Tax Proposals 45–46

Data, Stats & Graphs 47–71

16. 2016–2017 Tax Brackets 47–4917. Education Tax Breaks 50–5718. Average Itemized Deductions 5819. Avoiding an Audit: Steps to Make an Audit Less Painful 59–6220. Individual Audit Data 6321. Retirement by the Numbers 64–6522. Historical Look at Capital Gains Rates 6623. Historical Look at Income Tax Rates 6724. Historical Look at Estate and Gift Tax Rates 68–71

Resources 72

25. Helpful Resources for Reporters 72

Media Contacts:

Laura Gingiss (847) 267‑2213 [email protected]

Brenda Au (847) 267‑2046 [email protected]

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Individual and Corporate TaxationMark Luscombe, JD, LLM, CPAPrincipal Federal Tax AnalystMark Luscombe, a CPA and attorney, is the principal federal tax analyst for the company, tracking and analyzing legislation before Congress. Luscombe is the current chair of the Important Developments Subcommittee of the Partnership Committee of the American Bar Association Tax Section and regularly speaks on a wide range of tax topics. In addition, Luscombe co‑authors a monthly tax strategies column for the respected professional publication Accounting Today and authors a monthly tax trends column for TAXES magazine. Prior to joining Wolters Kluwer, he was in private practice for almost 20 years with several Chicago‑area law firms where he specialized in taxation.

Luscombe offers a thorough understanding and analysis of federal tax, its application and its impact on both the individual and corporate taxpayer. George Jones, JD, LLMSenior Federal Tax Analyst George Jones has been active in the tax field for over 35 years. As managing editor in Wolters Kluwer Tax & Accounting’s Washington D.C. office, Jones is responsible for overseeing legislative information at Wolters Kluwer. In addition, Jones is editor of CCH Federal Tax Weekly; CCH Expert Treatise; Federal Taxation of Corporations and Shareholders; and co‑authors a regular tax strategies column for the respected professional publication, Accounting Today.

Jones keeps his finger on the pulse of the IRS, Congress, and the tax and accounting profession.

Mildred Carter, JDSenior Federal Tax AnalystMildred Carter has extensive background in federal tax analysis and specific expertise in individual and small business and corporate tax planning issues. As a senior federal tax analyst, she is an important contributor to Wolters Kluwer’s coverage of new Tax Legislation in the Law, Explanation and Analysis books. She also contributes to two of the most popular tax professional references in the country, the CCH Tax Research Consultant and the Standard Federal Tax Reporter and has developed and authored several interactive research aids, which are available online through CCH IntelliConnect.

Concentrating on the impact of federal tax laws, Carter provides in-depth explanations and analysis of tax law provisions.

Estates, Wills and TrustsBruno Graziano, JD, MSASenior Estate and Gift Tax AnalystBruno Graziano is an attorney with a master’s degree in accountancy and is a senior analyst for Wolters Kluwer Tax & Accounting’s Financial and Estate Planning Group. An employee for 29 years, he oversees the editors and analysts responsible for two of the most respected Wolters Kluwer subscription products, Financial and Estate Planning and Estate Planning Review ‒ The Journal. Prior to joining Wolters Kluwer, Graziano was an assistant attorney for an Illinois municipality.

Graziano has a detailed knowledge of gift and estate taxation, wills, trusts and related tax law.

Wolters Kluwer Tax Experts(NEW YORK, NY, January 2017) — Wolters Kluwer Tax & Accounting, a division of Wolters Kluwer, is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency. The company produces hundreds of products annually related to federal, state and international taxation. Tax analysts and editors, most of whom are attorneys or accountants, provide professionals with tax information on a daily basis. Analysts available to speak with reporters include:

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2017 Whole Ball of Tax — Release 1 2Experts

State TaxationCarol Kokinis‑Graves, JDSenior State Tax AnalystAs a senior state tax analyst in the Sales and Use Tax Group, Carol Kokinis‑Graves analyzes and reports state and local sales and use tax issues. She researches and covers state legislation, court cases, department of revenue rulings, and regulations. Kokinis‑Graves has developed and authored several interactive research aids (logic tools), and has authored a continuing professional education (CPE) course for accountants. She has written several articles, including those that have appeared in State Tax Review, The Journal of State Taxation, and Practitioner Perspectives. Kokinis‑Graves is a speaker on state and local tax (SALT) issues, and has been quoted in various publications, including The Los Angeles Times, The Chicago Sun-Times, The Washington Times, USA Today, Forbes, Reuters, NBC News, The Tax Foundation, Market Watch, and Accounting Today.

Kokinis-Graves possesses a thorough knowledge of state and local sales and use taxes.

John Logan, JDSenior State Tax AnalystJohn Logan is an attorney and senior state tax analyst who has spent more than 25 years tracking and analyzing state tax statutory and case law, as well as state tax regulatory policy. He is a contributor to CCH IntelliConnect, which includes State Tax Review, a weekly newsletter that reports on tax news at the state level, as well as State Tax Reporters, State Tax Guide, and the Multistate Corporate Income Tax Guide.

Logan has a thorough understanding of the various state taxes imposed, as well as taxation trends across all states.

Rocky Mengle, JDSenior State Tax AnalystRocky Mengle is an attorney and state tax analyst and has spent the last 16 years analyzing state tax legislation, case law, and regulatory developments. He is a contributor to Wolters Kluwer’s State Tax Handbook and CCH IntelliConnect, which includes State Tax Reporters, Multistate Corporate Income Tax Guide, and various interactive Smart Charts. He has been quoted in various publications, including U.S. News and World Report, Reuters, and Accounting Today.

Mengle offers a detailed understanding of state personal and corporate income taxation and trends across all states.

International TaxationJoy Hail, JD, LLMInternational Tax Analyst and Managing Editor Joy Hail is the managing editor of International Tax for Wolters Kluwer Tax & Accounting. She also is managing editor of the company’s bimonthly International Tax Journal as well as an expert in international Base Erosion and Profit Sharing (BEPS). Hail is the author of the publication, Base Erosion and Profit Sharing (BEPS) — Are You Ready, which provides practical guidance on country‑by‑country reporting of the current BEPS action plan. The guide covers each of the 15 actions outlined by the Organisation for Economic Co‑operation and Development (OECD) and analyzes the U.S. position on BEPS and the impact BEPS will have.

Hail monitors continuing changes in international tax compliance affecting cross-border transactions and is an important contributor for updated research and learning content covering international taxation developments.

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s About Wolters Kluwer Tax & AccountingWolters Kluwer Tax & Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency.

Wolters Kluwer Tax & Accounting is part of Wolters Kluwer N.V. (AEX: WKL), a global leader in information services and solutions for professionals in the health, tax and accounting, risk and compliance, finance and legal sectors. Wolters Kluwer reported 2015 annual revenues of €4.2 billion. The company, headquartered in Alphen aan den Rijn, the Netherlands, serves customers in over 180 countries, maintains operations in over 40 countries and employs 19,000 people worldwide. Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over‑the‑counter market in the U.S. (WTKWY).

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2017 Whole Ball of Tax — Release 3 4Tax N

ewsTax Filing Deadlines. The individual tax filing

deadline is Tuesday, April 18, 2017, due to April 15 falling on a weekend and Monday, April 17 being a holiday in the District of Columbia. Partnership returns are now due to be filed on March 15, 2017 rather than April 15. Many corporate tax returns are now to be filed on April 18, 2017 rather than March 15. S Corporation returns are still due March 15. Forms W‑2 and 1099‑Misc. now must generally be filed by January 31, 2017. FBAR reporting of foreign bank accounts is moved to April 18, 2017 from June 30.

Refundable Credits. The PATH Act introduced a number of new restrictions on taxpayers claiming the Earned Income Tax Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit. These include: deadlines for obtaining Social Security numbers and Taxpayer Identification Numbers; expanded due diligence requirements for the tax return preparer; expanded restrictions on taxpayers who made improper claims for the credits in prior years; an increased underpayment of tax penalty; a February 15 limit on how soon the IRS can issue a refund; and, for the American Opportunity Tax Credit, new requirements to obtain Form 1098‑Ts and to include the educational institution’s employer identification number on the tax return.

Mortgage Interest Deduction. The IRS acquiesced in the Voss case, making the mortgage principal limitations on the mortgage interest deduction applicable on a per‑taxpayer rather than a per‑residence basis. Additional mortgage information is also required on the Form 1098, including the amount of the mortgage, the address of the property, and the loan origination date.

Health Care. The personal responsibility payment for failure to obtain health insurance has increased to the greater of $695 (from $325 in 2015) or 2.5 percent (from 2 percent in 2015) of household income. The Cures Act enacted on December 13, 2016 also enables small businesses to offer Qualified Small Employer Health Reimbursement Arrangements without penalties.

Bonus Depreciation. With respect to 50 percent bonus depreciation, the allowance for qualified leasehold improvement property was replaced by an allowance for additions and improvements to the interior of any nonresidential real property. Farmers were also allowed to claim a 50 percent deduction in place of bonus depreciation on certain trees, vines, and plants in the year of planting or grafting rather than the placed‑in‑service year.

Olympic Winners. Receipts of Olympic medals will not be taxed on the value of the medal or monetary awards from the U.S. Olympic Committee.

What’s New for the 2016 Tax Season? Wolters Kluwer Reviews Changes Taxpayers Need to Know

(NEW YORK, NY, January 2017) — While 2016 was not a significant year for tax legislation, the upcoming tax return filing season will see more changes than the prior tax filing season, according to Wolters Kluwer Tax & Accounting.

“Taxpayers will experience more changes this year due to the fact that adjustments to the Tax Code made by the PATH Act enacted at the end of 2015, and in particular changes to the expired tax breaks that were made permanent by the PATH Act, were generally not effective until 2016,” said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting.

Below are some of the more significant changes that taxpayers and tax return preparers should be aware of as they get ready to file their taxes this year:

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Research Credit. The research credit has expanded in two different ways to help small businesses. It can be used to reduce the alternative minimum tax and a specific amount can be used to offset the payroll tax on employees.

Work Opportunity Credit. The Work Opportunity Credit is expanded to add a new category for qualified long‑term unemployment recipients.

Expired Tax Breaks. Although many popular regularly expiring tax breaks were made permanent by the PATH Act, other tax breaks continue to expire, with several individual, business and energy‑related tax breaks expiring at the end of 2016, including, for individuals, the tuition and fees deduction, the exclusion for mortgage debt

forgiveness, and the mortgage insurance premium deduction.

Partnership Audit Rules. New partnership audit rules are effective for 2018, but partnerships under audit can elect to apply the new rules earlier.

Country‑by‑Country Reporting. Although the United States will not require multi‑national companies to begin country‑by‑country reporting until 2017, other countries in which they may operate have started to require country‑by‑country reporting for 2016 under the Base Erosion/Profit Shifting initiative of the OECD. Companies subject to such reporting for 2016 will have the option to report to the IRS rather than directly to the countries with the 2016 reporting requirement.

About Wolters Kluwer Tax & Accounting

Wolters Kluwer Tax & Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency.


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ewsIRS statistics indicate that identity theft

investigations reached a peak of 1,492 cases in Fiscal Year 2013, falling to 1,063 in 2014, 776 in 2015 and 573 in 2016. One way criminals steal SSNs is by calling or emailing potential victims or, more recently by hacking into online systems of tax return preparers or other third parties. These phishing techniques can get taxpayers to reveal personal information voluntarily or have their personal information extracted from online databases belonging to the taxpayer, the tax return preparer, or other third‑party sources such as retailers, insurance companies, financial institutions, and health care providers.

Another way criminals have been scamming taxpayers is by calling taxpayers pretending to be from the IRS and demanding immediate payment of tax debts under threat of criminal proceedings.

The IRS has been developing techniques to try to deal with these tax scams, including improved ways to screen tax returns for suspicious activity such as multiple returns for the same address and changes of addresses for taxpayers. The IRS is also offering an additional identity code on tax returns for identity theft victims and has begun experimenting with an additional security code on W‑2 forms.

The IRS has also started working with the tax return preparation industry to help put a stop to these scams. Tax return preparers are being urged to review the IRS computer systems for returns filed under their name and filing identification number to insure that those returns were in fact submitted by them. Tax software providers are requiring additional security steps for their clients to access return information online.

With respect to phone scams, the IRS has issued identity theft guidance clarifying IRS collection procedures, and assuring taxpayers that a phone call or email would not be the first method of contact from the IRS about a tax collection problem.

For TaxpayersIn its Taxpayer Guide to Identity Theft, the IRS clarifies that neither it nor any legitimate organization, such as a bank or well‑known business will ever seek personal information through unsecured e‑mails or phone calls. Furthermore, the IRS states that it will never:

• Ask for credit or debit card numbers over the phone

• Require a single, specific tax payment method, such as a prepaid debit card

• Send unsolicited emails or calls to anyone threatening lawsuits or prison time

Identity Theft, Phishing, and Phone Scams, Oh My!Wolters Kluwer Provides Guidance for Avoiding Taxpayer ID Theft and Tax Scams

(NEW YORK, NY, January 2017) — The IRS has begun to develop techniques to stem the growth of identity theft in the tax area, as IRS‑related phone scams and phishing by criminals for tax return information continues to be a big concern, according to Wolters Kluwer Tax & Accounting.

According to the IRS, tax‑related identity theft occurs when someone’s stolen Social Security number (SSN) is used for filing a tax return claiming a fraudulent refund. Identity thieves are known for using stolen SSNs to file a false return early in the year — leaving victims unaware that anything is wrong until they try filing a tax return and find out someone already filed a return with their SSN.

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If anyone believes they’re the target of an ID theft scam, the IRS recommends reporting the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1‑800‑366‑4484 and contacting the Federal Trade Commission (www.ftc.gov) through the FTC Complaint Assistant link.

The IRS also offers the following checklist steps to consider for protecting tax and financial information from scam artists:

� Read your credit card and banking statements carefully and often — watch for even the smallest charge that appears suspicious. (Neither your credit card nor bank — or the IRS — will send you emails asking for sensitive personal and financial information such as asking you to update your account).

� Review and respond to all notices and correspondence from the IRS. Warning signs of tax‑related identity theft can include IRS notices about tax returns you did not file, income you did not receive or employers you’ve never heard of or where you’ve never worked.

� Review each of your three credit reports at least once a year. Visit annualcreditreport.com to get your free reports.

� Review your annual Social Security income statement for excessive income reported. Electronic accounts are available at the United States Social Security Administration.

� Read your health insurance statements; look for claims you never filed or care you never received.

� Shred any documents with personal and financial information. Never toss documents with your personally identifiable information, especially your Social Security number, in the trash.

� If you receive any routine federal deposit such as Social Security Administration or Department of Veterans Affairs benefits, you probably receive those deposits electronically. You can use the same direct deposit process for your federal and state tax refund. IRS direct deposit is safe and secure and places your tax refund directly into the financial account of your choice.

For Tax PractitionersA publication from Wolters Kluwer Tax & Accounting entitled, Tax Practitioner’s Guide to Identity Theft, is a comprehensive guide which explores federal and state statutes that criminalize identity theft, and the recent cooperative steps taken by the IRS, the Department of Justice, the FBI, the Secret Service, and the U.S. Postal Inspection Service to protect personally identifiable information and pursue identity thieves. It also provides 25 “best practices” that clients can employ to decrease the risk of both tax‑related and non‑tax related identity theft.

The Tax Practitioner’s Guide to Identity Theft is available in print and as an e‑book for computer and mobile device downloads.

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� Home Office Deduction — A simplified safe-harbor method for this deduction was introduced in 2013 for those who are self-employed and work out of their homes. It is based on the size of home office and is designed to be a simple calculation. Here’s how it works: Eligible taxpayers can deduct $5 for every square foot of workspace used — up to a maximum of 300 square feet. So, if you use a den or spare bedroom at home as your home office and it measures 18 X 15 feet for a total of 270 square feet — multiply that by $5 for a total home office tax deduction of $1,350. The simplified safe-harbor option saves time compared to the standard home office tax deduction calculation of figuring related expenses and how they are apportioned over the course of the year to a home office. One taxpayer-friendly benefit is that one may choose which calculation, either the safe-method or the standard method, to use each year to provide the largest tax deduction.

� Mortgage Interest Deduction — As a result of a recent court decision, the IRS has changed its position and now allows the mortgage interest deduction limits to be applied on a per taxpayer rather than a per residence basis. This means that two unrelated owners of a home can now each claim a mortgage interest deduction related to up to one million dollars in mortgage debt related to purchase, construction or improvement of the home and up to $100,000 for a line of credit secured by the home.

� Mortgage Debt Exclusion — The PATH Act, enacted in December 2015, prevents forgiveness of mortgage debt from suddenly being counted as additional taxpayer income, since the mortgagor no longer is making payments on the forgiven portion, but not pocketing the savings in cash. Those who qualify may benefit on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) through 2016. The Act also modifies the exclusion to apply to qualified principal residence indebtedness

Claim Those Tax Deductions Before They Go Away Wolters Kluwer Tax Experts Highlight Deductions and Credits That Are Easy to Miss

(NEW YORK, NY, January 2017) — Hitting the send button to e‑file a tax return or dropping an envelope with completed forms in the mail is always a welcome relief, especially if a refund is expected. However, discovering that you missed taking a qualified deduction or suddenly learning you had a tax break you didn’t take advantage of can turn relief into frustration.

Both deductions and tax credits can make significant impacts in reducing or offsetting taxes owed, but taxpayers must first find out whether they qualify for certain tax breaks and not assume they’re covered.

“With tax reform on the agenda for 2017, several tax deductions and credits might be sacrificed in order to lower tax rates, so make sure that you claim all of the tax breaks to which you are entitled before they disappear,” said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting. “Consulting a tax professional about potential deductions and credits that you may not be aware of is a good idea, but it pays to do a little research ahead of time so you know what to ask about.”

Need‑to‑know Tax Deductions and Credits Checklist

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discharged in 2017 if the discharge is made under a binding written agreement in 2016. In other words, taxpayers who enter into a foreclosure, short sale or home loan adjustment in writing before December 31, 2016, but do not complete the transaction until after January 1, 2017, may qualify for the exclusion. Because the forgiven portion is not considered added income, taxpayers will not vault into a higher tax bracket or be taxed on that amount within their current bracket.

� Home Mortgage Insurance Premium Deduction — It’s one of the more popular deductions that was extended through 2016 with passage of the PATH Act — allowing most homeowners to write off their home mortgage insurance premium as interest paid on a mortgage. Taxpayers can deduct mortgage interest paid on their primary home and on a second or vacation home. In addition, mortgage interest on a line of credit or home equity loan, which is secured by the home, is also deductible.

� Charitable Donations — Taxpayers who donate money or non‑cash property to qualified charities may be entitled to a tax deduction. While charitable gifts via a check may be easiest to track, a receipt or official acknowledgement of the donation from the charitable organization is a mandatory requirement for tax reporting. Additional documentation is required to establish the fair market value of non‑cash items. Also:

• Travel expenses associated with charitable volunteer activities may also be tax deductible.

• Charitable donations may be limited based on a percentage of adjusted gross income (AGI) depending on the type of organization and property donated.

� Medical, Dental Expense Deductions — Expenses related to diagnoses and treatment of medical and dental conditions may also be

deducted from your income taxes, depending on how much you paid out of pocket compared to how much you earned. The general rule is that qualified medical and dental costs that exceed 10 percent of a taxpayer’s AGI may be deducted (7.5 percent for people age 65 or over before January 1, 2017). Typical expenses may include unreimbursed medical and dental bills, and the unreimbursed costs of equipment, supplies and devices prescribed by a physician or dentist for use in treating a condition.

� Medicare Premium Deductions, Self‑Employed — Business owners and self‑employed taxpayers may deduct health insurance premiums. Those who are old enough to qualify for Medicare and are also business owners or self‑employed may deduct premiums paid for Medicare Part B, Part D and supplemental Medicare policies to guard against health care coverage gaps. However, the deduction is not available for anyone who is already covered under their or their spouse’s employer’s health plan.

� Business Expense Tax Deductions — For sole proprietors, self‑employed workers, contractors and others incurring qualified business expenses related to their occupation, income tax deductions are available. In most cases, eligible business expenses must both be ordinary, something common and acceptable in that particular business, as well as necessary, something appropriate and helpful to the business or trade. The IRS requires that business expenses should be separated from other expenses used to figure the cost of goods sold, capital expenses and personal expenses. Furthermore, business expense deductions can only be taken once, either on an individual’s income tax return or a separate business tax return — but not on both.

� Child Tax Credit — The maximum child tax credit of $1,000 per child age 17 or younger is now permanent. For taxpayers with nominal tax liability, a portion of the child

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tax credit may be refundable. However, the amount of the credit may be less, depending on income level.

� Child and Dependent Care Credit — This credit may be claimed by eligible taxpayers who paid work‑related expenses for the care of a qualifying individual in order for an eligible taxpayer to be able to work or look for employment. It is a percentage of the amount paid to a care provider and depends on a taxpayer’s AGI. A dependent child must be under 13‑years‑old when care was provided to qualify.

� Adoption Credit — Newly adoptive parents are eligible to claim up to $13,460 per child for 2016 taxes ($13,570 for 2017). However, the credit decreases for those with a modified adjusted gross income (MAGI) of more than $201,920 ($203,540 in 2017). Plus, taxpayers with a MAGI of more than $241,920 ($243,540 in 2017) cannot claim the credit. The adoption credit was also made permanent in 2013 and it’s the largest nonrefundable tax credit available

to individuals. Those claiming the credit on their income taxes must file Form 8839, Qualified Adoption Expenses Documentation of qualified adoption expenses, including any adoption decree or court order, should be retained with copies of the tax return.

� Earned Income Tax Credit (EITC) — The PATH Act made permanent the EITC increase ($5,000) in phase‑out amounts for joint tax return filers. The Act also made permanent the increased credit of 45 percent for taxpayers with three or more qualifying children. Without the changes, both enhancements were set to expire in 2017. The EITC is a refundable federal tax credit aimed at helping low and moderate income workers keep more of their paychecks. It was enacted in 1975 to offset Social Security taxes for those who qualify and as an incentive for more people to join the workforce. When the EITC exceeds the amount of taxes to be paid, it can then generate a tax refund for eligible taxpayers who claim the credit.




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Individual Mandate. For 2016, the last of the statutory increases in the individual mandate imposed on individuals for failure to obtain health insurance comes into effect. The dollar amount increases to $695 per person (as compared to $325 for 2015), and the percentage of household income increases to 2.5 percent (as compared to 2 percent in 2015). The individual mandate is the greater of those two amounts.

Medical Expense Deduction. The year 2016 will also be the last year that taxpayers age 65 and older will be entitled to a medical expense deduction threshold of over 7.5 percent of adjusted gross income. Starting in 2017, the threshold becomes 10 percent for all taxpayers.

Medical Device Excise Tax. The PATH Act suspended for two years the 2.3 percent tax on certain medical devices. The tax has now been suspended for 2016 and 2017 and will commence again for sales beginning on January 1, 2018.

“Cadillac” Tax. The PATH Act also delayed implementation of the excise tax on high cost employer‑sponsored health coverage, the so‑called “Cadillac” tax. Originally scheduled to come into effect for tax years beginning after December 31, 2017, it is now scheduled to come into effect for tax years beginning after December 31, 2019.

Levy on Medicare Payments. Another health care‑related change brought about by the PATH Act increased the portion of a payment owed to a Medicare provider or supplier that may be subject to a continuous IRS levy to collect an unpaid tax liability from 30 percent to 100 percent. The change is effective for payments made after October 13, 2015.

Health Reimbursement Arrangements. The 21st Century Cures Act, enacted on December 13, 2016, permits small businesses that had been offering health reimbursement arrangements to their employees (under which the business reimburses the employee for individually obtained health insurance coverage, and that were forced to stop under threat of penalties imposed under the Affordable Care Act) to now return to health reimbursement arrangements if some additional requirements are met. The new requirements for Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) are as follows:

• Only employers that are not Applicable Large Employers (ALEs) under the Affordable Care Act (i.e. have less than an average of 50 full‑time or full‑time equivalent employees for the prior year) are eligible to establish QSEHRAs.

Taxes and Health Care: An Uncertain FutureWolters Kluwer Examines Tax Changes Related to Health Care Impacting 2016 Tax Returns

NEW YORK, NY, January 2017) — Having witnessed the rollout of various provisions of the Affordable Care Act, the tax changes involving health care for 2016 were relatively minor compared to past years. For 2017, however, Congress is looking at repealing and replacing the Affordable Care Act.

“It is far from clear what will be repealed and when and what a replacement might look like,” said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting. “There is even debate as to whether you can repeal first and replace later.”

The following outlines tax changes related to health care that impact 2016 tax returns. However, these changes are up for grabs in 2017 as health care reform is debated.

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• The employer must not otherwise offer a group health plan.

• The QSEHRA must be offered to all full‑time employees who have completed at least 90 days of service and are at least 25 years of age. Certain exclusions are provided for employees who are nonresident aliens, part‑time workers, seasonal workers, or covered by a collective bargaining agreement.

• THE QSEHRA must be funded exclusively with employer contributions — no employee contributions.

• QSEHRA contributions are limited to $4,950 per year for single coverage, $10,000 per year for family coverage, with the possibility provided for certain variations based on local insurance costs, age or family size.

• The employer may only reimburse qualified medical expenses, including health insurance premiums.

• In order for the QSEHRA reimbursements not to be taxable to the employee, the employee must provide proof that the employee and any included family members have obtained minimum essential coverage from a health insurance exchange or other third‑party provider.

• A notice must be provided to employees that includes the amount of the employee’s benefit, a statement that the benefit must be disclosed to any health insurance exchange if the employee is claiming advance premium tax credits, and a warning to the employee of possible tax penalties if the employee and any applicable family members do not have minimum essential coverage.

The Cures Act also waives past penalties to which a small business may have been subject for offering health reimbursement arrangements in violation of the Affordable Care Act.




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Deciding Where to Retire: Finding a Tax‑friendly State to Call HomeWolters Kluwer Reviews State Tax Treatments of Retirement Benefits

(NEW YORK, NY, January 2017) — While the allure of warmer weather or being close to family are major factors in selecting a place to retire — so is calculating the best places to stretch a fixed retirement income. A little pre-retirement homework on state tax treatments of retirement benefits and other financial factors can be a key step in deciding where to establish new, post-career roots. Specific factors to consider include: • State taxes on retirement benefits • State income tax rates • State and local sales tax• State and local property taxes • State estate taxes

Taxability of Retirement Benefits Varies State to State Currently, seven states do not tax individual income — retirement or otherwise: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Two other states — New Hampshire and Tennessee — impose income taxes only on dividends and interest (5 percent flat rate for both states).

In the other 41 states and the District of Columbia, tax treatment of retirement benefits varies widely. For example, some states exempt all pension income or all Social Security income. Other states provide only partial exemption or credits and some tax all retirement income.

States exempting pension income entirely for qualified individuals are Illinois, Mississippi and Pennsylvania.

States that exempt or provide a credit for a portion of pension income include: Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, South Carolina, Utah, Virginia and Wisconsin.

States where pension income is taxed include: Arizona, California, Connecticut, District of Columbia, Idaho, Indiana, Kansas,

Massachusetts, Minnesota, Nebraska, North Carolina, North Dakota, Rhode Island, Vermont and West Virginia.

(See charts on pages 17–28 for additional details.)

Significant State Tax ReformsStates enacting changes to their income tax laws for retirement plans in 2016 include:

• Minnesota: Military retirement pay (including pensions) is deductible. (Change is effective beginning with 2016 tax year.)

• New Jersey: The gross (personal) income tax exclusion on pension and retirement income is increased over a four‑year period from $20,000 to $100,000 for married taxpayers filing jointly, from $15,000 to $75,000 for single and head‑of‑household filers, and from $10,000 to $50,000 for married taxpayers filing separately. (Change is effective beginning with the 2017 tax year.)

• Rhode Island: Taxpayers who have reached the Social Security retirement age are eligible for a $15,000 exemption on their retirement income. This exemption applies to single taxpayers with federal adjusted gross incomes of up to $80,000 and for joint taxpayers with federal adjusted gross incomes of up to $100,000 that are otherwise qualified (these amounts will be adjusted annually for inflation). (Change is effective beginning with 2017 tax year.)

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• South Carolina: A new deduction for military retirement income is allowed. For taxpayers under 65 years of age, the deduction is $5,900 for the 2016 tax year, but increases by $2,900 each year until it is fully phased‑in at $17,500 in 2020. For taxpayers 65 years of age or older, the deduction is $18,000 for the 2016 tax year, but increases by $3,000 each year until it is fully phased‑in at $30,000 in 2020. (Change is effective beginning with 2016 tax year.)

While some states tax pension benefits, only 13 states impose tax on Social Security income: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. These states either tax Social Security income to the same extent that the federal government does or provide limited breaks for Social Security income, often for lower‑income individuals.

(See State Taxation of Retirement Income chart on pages 17–19 for full details.)

State Income, Property, Sales Taxes Can Add UpIn addition to state taxes on retirement benefits, other taxes to consider when evaluating financial factors on where to retire include:

• State income tax rates: For example, income tax rates also can have a significant financial impact on retirees in determining where they want to live and can vary widely across the country. While seven states have no income tax and two tax only interest and dividend income, several have a relatively low income tax rate across all income levels. For example, the highest marginal income tax rates in Arizona, Kansas, New Mexico, North Dakota and Ohio are below 5 percent. Some states have a relatively low flat tax regardless of income, with the five lowest: Colorado (4.63 percent), Illinois (3.75 percent), Indiana (3.23 percent), Michigan (4.25 percent) and Pennsylvania (3.07 percent) for 2017.

• State and local sales taxes: Forty‑five states and the District of Columbia impose a state sales and use tax (only Alaska, Delaware, Montana, New Hampshire and Oregon do not impose a state sales and use tax, although some Alaska localities do). States with a relatively high state sales tax rate of 7 percent include Indiana, Mississippi, Rhode Island, and Tennessee. California has a state sales tax rate of 7.25 percent. Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate.

• State and local property taxes: While property values have declined over recent years in many areas, it has not necessarily been the case for property taxes. However, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, tax deferral, refund or other benefits. These tax breaks also are available to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary.

• State estate taxes: Estate taxes also can influence where seniors want to retire. Rules vary from state to state, as well as from federal estate tax laws. While some states, such as Delaware and Hawaii, follow the federal exclusion amount ($5,450,000 in 2016 and $5,490,000 in 2017), others do not. The latter category includes Illinois ($4 million), Massachusetts ($1 million), and New York ($2,062,500 for deaths on or after April 1, 2014, and before April 1, 2015, and $3,125,000 for deaths on or after April 1, 2015, and before April 1, 2016; and $4,187,500 for deaths on or after April 1, 2016 and before April 1, 2017).

Other states, including Arizona, Kansas and Oklahoma, no longer impose an estate tax. Still others, like California and Florida, technically still have such a tax on their books, but collect no revenue because their tax is based on the now‑repealed federal credit for state death taxes. In general, this is an area

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of the law that has been in a considerable state of flux in recent years and will probably continue to be so in the foreseeable future.

(For more information on estate tax issues, see Release 13 on pages 39–41.)




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State Taxation of Retirement Income The following chart shows generally which states tax retirement income, including Social Security and pension income for the 2016 tax year unless otherwise noted. States shaded indicate they do not tax these forms of retirement income.

State State Tax of Social Security Income State Tax of Pension Income

Alabama Not taxed Exemption for defined benefit plans

Alaska No individual income tax No individual income tax

Arizona Not taxed Generally taxable

Arkansas Not taxed Exempt to certain level

California Not taxed Generally taxable

Colorado Exempt to a certain level; age restrictions apply

Exempt to a certain level; age restrictions apply

Connecticut Exemption based on adjusted gross income (AGI)

Generally taxable

Delaware Not taxed Exempt to a certain level; age restrictions apply

District of Columbia Not taxed Generally taxable

Florida No individual income tax No individual income tax

Georgia Not taxed Exempt to a certain level; age restrictions apply

Hawaii Not taxed Distributions are partially exempt

Idaho Not taxed Generally taxable

Illinois Not taxed All income from federally qualified pension plans are generally exempt

Indiana Not taxed Generally taxable

Iowa Not taxed Exempt to a certain level; age restrictions apply

Kansas Exemption based on AGI Generally taxable

Kentucky Not taxed Exempt to a certain level

Louisiana Not taxed Exempt to a certain level; age restrictions apply

Maine Not taxed Exempt to a certain level

Maryland Not taxed Exempt to a certain level; age restrictions apply

Massachusetts Not taxed Generally taxable

Michigan Not taxed Exempt to a certain level; age restrictions apply

Minnesota Taxed Generally taxable

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Mississippi Not taxed Not taxed

Missouri Exemption based on AGI Exempt to a certain level; income restrictions apply

Montana Exemption based on AGI Exempt to a certain level; income restrictions apply

Nebraska Exemption based on AGI Generally taxable

Nevada No individual income tax No individual income tax

New Hampshire Only dividends and interest are taxable

Only dividends and interest are taxable

New Jersey Social Security excluded from gross income

Exempt to a certain level; age and income restrictions apply

New Mexico Taxed Exempt to a certain level; age and income restrictions apply

New York Not taxed Exempt to a certain level; age restrictions apply

North Carolina Not taxed Generally taxable

North Dakota Taxed Generally taxable

Ohio Not taxed Credits for pension distribution or income allowed; age restrictions apply

Oklahoma Not taxed Exempt to a certain level

Oregon Not taxed Credit for pension distribution or income allowed; age and income restrictions apply

Pennsylvania Not taxed Not taxed; age restrictions apply

Rhode Island Exemption based on AGI Generally taxable (beginning in 2017, exempt to a certain level; age and income restrictions apply)

South Carolina Not taxed Exempt to a certain level; age restrictions apply

South Dakota No individual income tax No individual income tax

Tennessee Only dividends and interest are taxable

Only dividends and interest are taxable; exemption available with age and income restrictions

Texas No individual income tax No individual income tax

State Taxation of Retirement Income Continued

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Utah Partial credit for Social Security benefits allowed; age and income restrictions apply

Partial credit for retirement income allowed; age and income restrictions apply

Vermont Taxed Generally taxable

Virginia Not taxed Exempt to a certain level; age and income restrictions apply

Washington No individual income tax No individual income tax

West Virginia Taxed Generally taxable

Wisconsin Not taxed Exempt to a certain level; age and income restrictions apply

Wyoming No individual income tax No individual income tax

State Taxation of Retirement Income Continued

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State Tax Treatment of Social Security, Pension IncomeThe following chart provides a general overview of how states treat income from Social Security and pensions for the 2016 tax year unless otherwise noted. States shaded indicate they do not tax these forms of retirement income.

State Social Security Income Pension IncomeAlabama State computation not based on

federal. Social Security benefits excluded from taxable income

Payments from defined benefit plans exempt.

Alaska No individual income tax No individual income tax

Arizona Social Security benefits subtracted from federal AGI

Individual taxpayer’s pension income is generally taxable

Arkansas State computation not based on federal. Social Security benefits excluded from taxable income

Up to $6,000 total in retirement pay benefits and benefits received from an individual retirement account (IRA) is exempt

California Social Security benefits subtracted from federal AGI


Colorado Pension income, including Social Security benefits, up to $24,000 may be subtracted from federal taxable income by those 65 and older, and up to $20,000 by those 55 through 64 years old

An individual taxpayer 55 through 64 years old can exclude up to $20,000 ($24,000 for a taxpayer aged 65 or older) in pension and annuity income.

Connecticut Joint filers and heads of households with AGIs under $60,000, and single filers and married taxpayers filing separately with AGIs under $50,000; deduct from federal AGI all Social Security income included for federal income tax purposes. Joint filers and heads of households with AGIs over $60,000, and single filers and married taxpayers filing separately with AGIs over $50,000, deduct the difference between the amount of Social Security benefits included for federal income tax purposes and the lesser of 25 percent of Social Security benefits received or 25 percent of the excess of the taxpayer’s provisional income in excess of the specified base amount under IRC Sec. 86(b)(1)


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State Social Security Income Pension IncomeDelaware Social Security benefits subtracted

from federal AGIAn individual taxpayer younger than 60 may deduct pension amounts of up to $2,000, and a taxpayer 60 or older may deduct up to $12,500. Eligible amounts for a taxpayer 60 or older include dividends, capital gains, interest, rental income, and distributions from qualified retirement plans

District of Columbia Social Security benefits subtracted from federal AGI


Florida No individual income tax No individual income tax

Georgia Social Security benefits subtracted from federal AGI

An individual taxpayer age 62 to 64 may exclude up to $35,000 of retirement income; an individual 65 or older may exclude up to $65,000. Up to $4,000 of the maximum exclusion amount may be earned income

Hawaii Social Security benefits subtracted from federal AGI

Distributions derived from employer contributions to pensions and profit‑sharing plans are exempt

Idaho Social Security benefits subtracted from federal AGI


Illinois Social Security benefits subtracted from federal AGI

Income from federally qualified retirement plans, IRAs, retirement payments to a retired partner, and certain capital gains on employer securities are excluded

Indiana Social Security benefits subtracted from federal AGI


Iowa Social Security benefits subtracted from federal AGI

Married taxpayers age 55 or older filing a joint return may exclude up to $12,000 ($6,000 for an unmarried taxpayer) of pension benefits and other retirement pay. A special rule applies to a spouse filing separately

Kansas Taxpayers with a federal AGI of $75,000 or less are exempt from any state tax on their Social Security benefits


State Tax Treatment of Social Security, Pension Income Continued

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State Social Security Income Pension IncomeKentucky Social Security benefits subtracted

from federal AGIUp to $41,110 of retirement income from a pension plan, annuity contract, profit‑sharing plan, retirement plan or employee savings plan, including IRA amounts and other similar income, is exempt

Louisiana Social Security benefits subtracted from federal AGI

Up to $6,000 of the pension and annuity income of an individual taxpayer 65 or older is exempt

Maine Social Security benefits subtracted from federal AGI

A recipient of retirement plan benefits under an employee retirement plan or an IRA may generally subtract from federal AGI the lesser of:

• $10,000, reduced by the total amount of the recipient’s Social Security benefits and Railroad Retirement benefits paid; or

• The aggregate of retirement plan benefits received by the recipient under employee retirement plans or IRAs and included in the individual’s federal AGI

Maryland Social Security benefits subtracted from federal AGI

Up to $29,400, generally, in pension income (except income from an IRA, SEP or Keogh) is excludable for an individual taxpayer age 65 or older

Massachusetts Social Security benefits subtracted from federal AGI



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State Social Security Income Pension IncomeMichigan Social Security benefits subtracted

from federal AGIFor individuals born prior to 1946, up to $49,861 in pension and retirement income is deductible on a single return ($99,723 on a joint return). Individuals born from January 1, 1946, to January 1, 1950, can deduct up to $20,000 ($40,000 on a joint return) against all income, but cannot deduct pension and retirement benefits. For individuals born between January 2, 1950, and December 31, 1952, up to $20,000 in pension and retirement income is deductible on a single return ($40,000 on a joint return) in lieu of claiming the social security deduction and personal exemption. Individuals born from January 1, 1953, to January 1, 1955, who have reached age 62 and receive retirement benefits from employment exempt from Social Security may deduct up to $15,000 ($30,000 on a joint return) in qualifying pension and retirement benefits

Minnesota State computation begins with federal taxable income. No subtraction


Mississippi State computation not based on federal. Social Security benefits exempt in total

Retirement allowances, pensions, annuities or “optional retirement allowances” (income from Keogh plan, IRA or deferred compensation plan) are exempt

Missouri Social Security benefits that are included in federal AGI may be subtracted. Married couples with Missouri AGI greater than $100,000 and single individuals with Missouri AGI greater than $85,000, may qualify for a partial deduction

Combined return filers with Missouri AGI less than $32,000, single filers with Missouri AGI less than $25,000, and married filers filing separately with Missouri AGI less than $16,000 may deduct $6,000 ($12,000 combined filers) of their private retirement benefits, to the extent the amounts are included in their federal AGI.

Partial exemptions available to taxpayers with income levels above the AGI limits listed above.


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State Social Security Income Pension IncomeMontana Separate calculation to determine

taxable Social Security benefits. Benefits exempt if income is $25,000 or less for single filers or heads of households, $32,000 for married taxpayers filing jointly, and $16,000 for married taxpayers filing separately

For an individual taxpayer, up to $4,070 of pension and annuity income is exempt (reduced by $2 for every $1 of federal AGI that exceeds $33,910)

Nebraska Social Security benefits subtracted if taxpayer’s federal AGI is less than or equal to $58,000 for joint filers or $43,000 for all other filers


Nevada No individual income tax No individual income tax

New Hampshire Only dividends and interest are taxable

Only dividends and interest are taxable

New Jersey State computation not based on federal. All Social Security benefits are excluded by statute from gross income. Taxpayers age 62 or older who did not receive Social Security benefits, but would have been eligible for benefits, may qualify for a special exclusion of up to $6,000 for joint filers, heads of household, or surviving spouses; or up to $3,000 for single filers or married taxpayers filing separately

Taxpayers age 62 or older with total income of $100,000 or less may exclude pensions, annuities, or IRA withdrawals of up to $20,000 for joint filers; $10,000 for married taxpayers filing separately; or $15,000 for a single taxpayer, a head of household, or a qualifying widow(er). (Exclusion amounts increased over four‑year period beginning with 2017 tax year.) Taxpayers who did not claim the maximum pension exclusion amount because pension income was less than the maximum exclusion amount for the taxpayer's filing status may use the unclaimed portion of the pension exclusion to exclude other types of income

New Mexico State computation begins with federal AGI. No subtraction

An individual taxpayer age 65 or older may exempt up to $8,000 of income (100% of income if age 100 or older and not claimed as a dependent on another return), including pension income, depending upon the individual's filing status and federal AGI. Joint filers and head‑of‑household filers with AGI over $51,000, married taxpayers filing separately with AGI over $25,500, and single filers with AGI over $28,500 are not eligible for this exemption


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State Social Security Income Pension IncomeNew York Social Security benefits subtracted

from federal AGIFor an individual taxpayer age 59½ or older, $20,000 of pension and annuity income is exempt

North Carolina Social Security benefits subtracted from federal taxable income


North Dakota State computation begins with federal taxable income. No subtraction


Ohio Social Security benefits subtracted from federal AGI

A recipient of retirement income with an AGI of less than $100,000 may claim an annual credit ranging from $25 to $200, depending on the amount of retirement income received during the year. In lieu of the retirement income credit, taxpayers with an AGI of less than $100,000 receiving a lump‑sum distribution on account of retirement (no age requirement) may claim a credit calculated using a formula based on the amount of retirement income received and the taxpayer's expected remaining life. Finally, in lieu of the $50 senior citizen income credit (credit eligibility is dependent on age not retirement income), an individual taxpayer age 65 or older with an AGI of less than $100,000 may claim a credit for a lump‑sum distribution from a retirement, pension or profit‑sharing plan equaling $50 times the taxpayer’s expected remaining life years

Oklahoma Social Security benefits subtracted from federal AGI

Up to $10,000 of retirement benefits from a private pension is exempt for an individual taxpayer, but not to exceed the amount included in federal AGI


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State Social Security Income Pension IncomeOregon Social Security benefits subtracted

from federal taxable incomeAn individual taxpayer age 62 or older with household income of less than $22,500 ($45,000 for joint filers), Social Security and/or Railroad Retirement benefits of less than $7,500 ($15,000 for joint filers), and household income plus Social Security and/or Railroad Retirement Board benefits of less than $22,500 ($45,000 for joint filers) may claim a credit for pension income equal to the lesser of 9 percent of the individual’s net pension income or the individual’s state personal income tax liability

Pennsylvania State computation not based on federal. Social Security benefits not included in state taxable income

Retirement benefits received from eligible employer‑sponsored retirement plans are generally exempt, including distributions from employer‑sponsored deferred compensation plans, pension or profit sharing plans, 401(k) plans, thrift plans, thrift savings plans, and employee welfare plans. Distributions from an IRA are not taxable if the payments are received, including lump sum distributions, on or after reaching the age of 59½

Rhode Island Social Security benefits subtracted from federal AGI if federal AGI is $80,000 or less for single, head of household, or married filing separate taxpayers; or $100,000 or less for married filing joint or qualified widow(er) taxpayers

Individual taxpayer’s pension income is generally taxable. (Beginning in 2017, taxpayers who have reached the social security retirement age are eligible for a $15,000 exemption on their retirement income. This exemption applies to single taxpayers with federal AGI less than $80,000 and for joint taxpayers with federal AGI less than $100,000 that are otherwise qualified)

South Carolina Social Security benefits subtracted from federal taxable income

An individual taxpayer receiving retirement income may deduct up to $3,000. A taxpayer age 65 or older may deduct up to $10,000

South Dakota No individual income tax No individual income tax


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State Social Security Income Pension IncomeTennessee Only dividends and interest are

taxableOnly dividends and interest are taxable. Taxpayers 65 or older with total income from all sources of $37,000 or less ($68,000 or less for joint filers) are exempt

Texas No individual income tax No individual income tax.

Utah State computation begins with federal taxable income. No subtraction. Partial credit for Social Security benefits allowed (age and income restrictions apply)

An eligible retiree age 65 or older is allowed a nonrefundable retirement credit of $450. An eligible retiree under age 65 and born before 1953 is allowed a nonrefundable retirement credit equal to the lesser of $288 or 6 percent of the eligible retirement income for the taxable year for which the retiree claims the tax credit. These credits are phased out at 2.5 cents per dollar by which modified AGI exceeds $16,000 for married individuals filing separately, $25,000 for singles and $32,000 for heads of household and joint filers

Vermont State computation begins with federal taxable income. No subtraction


Virginia Social Security benefits subtracted from federal AGI

A $12,000 deduction is available to an individual taxpayer born before 1939. For taxpayers 65 and older born after 1938, the deduction is reduced dollar for dollar for every $1 that the taxpayer’s adjusted federal AGI exceeds $50,000 ($75,000 for married taxpayers). For a married taxpayer filing separately, the deduction is reduced by $1 for every $1 that the total combined adjusted federal AGI of both spouses exceeds $75,000

Washington No individual income tax. No individual income tax.

West Virginia State computation begins with federal AGI. No subtraction

Individual taxpayer’s pension income is generally taxable. However, subject to some qualification, an individual taxpayer who, by the last day of the tax year, has reached age 65 may deduct up to $8,000 to the extent that amount was includable in federal AGI


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State Social Security Income Pension IncomeWisconsin Social Security benefits subtracted

from federal AGI Taxpayers age 65 or older may subtract up to $5,000 of income from a qualified retirement plan or from an IRA if federal AGI is less than $15,000 ($30,000 for married taxpayers)

Wyoming No individual income tax No individual income tax

Source: Wolters Kluwer, 2017 Permission for use granted.


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Sales and Use Tax Rates and Rules for Online ShoppersWolters Kluwer Provides Key Details for Website, E‑Commerce Transactions (NEW YORK, NY, January 2017) — Whether you’re checking out at a big box store, shopping small or making a purchase through a mobile app, sales and use taxes apply. Cash register sales tax calculations are clear on your receipt when it comes to state and local sales taxes, but questions remain over tracking sales and use taxes on the ever-shifting Internet retail landscape of buying from favorite apps and web sites.

“It’s really rather straightforward,” said Carol Kokinis-Graves, JD and Senior State Tax Analyst for Wolters Kluwer Tax & Accounting. “Online shoppers should keep this rule in mind: If the seller charged sales tax on an online purchase, the consumer does not need to do anything further; if the seller did not charge sales or use tax, the consumer is responsible for payment of use tax, and many states allow for payment of the use tax on their annual income tax returns.”

State Sales Tax BreakdownOverall, 45 states and the District of Columbia currently have a sales tax. Sales tax is generally imposed on retailers who collect it from consumers when they make an in‑state purchase of an item, or in some instances a service. Use tax applies when a consumer makes a purchase from an out‑of‑state retailer for use in their resident state. Generally, if the out‑of‑state retailer does not collect the use tax, the consumer still owes it to the state department of revenue.

Reporting Use Tax on 2016 State Income Tax ReturnsWhile many taxpayers may still not know they are required to pay the tax if it’s not collected by a retailer, 28 states include instructions with their state tax returns for people to report any uncollected use tax and allow them to pay uncollected tax when filing their state income tax returns.

State returns providing use tax collection instructions:• Alabama• California• Colorado• Connecticut• Idaho• Illinois• Indiana• Kansas• Kentucky

• Louisiana• Maine• Massachusetts• Michigan• Mississippi• Nebraska• New Jersey• New York• North Carolina

• Ohio• Oklahoma • Pennsylvania • Rhode Island• South Carolina

• Utah• Vermont• Virginia• West Virginia• Wisconsin

“Most states have enacted legislation requiring remote sellers to collect tax from consumers,” said Kokinis‑Graves.

More States Enacting “Amazon” Laws Collectively, state‑initiated remote seller collection laws require online retailers (such as Amazon.com) to collect state use tax in circumstances in which the remote seller has some type of connection with the state, albeit not a physical presence.

New York enacted its click‑through nexus law in 2008. Amazon.com and Overstock.com challenged the statute, but the New York Court of Appeals held that online retailers who sold their products solely through the Internet failed to demonstrate that the statutory provision that required out‑of‑state Internet retailers with no physical presence in New York State to collect sales and use taxes was unconstitutional — under either the Commerce Clause or the Due Process Clause. Ultimately, the U.S. Supreme Court in December 2013 denied the requests of Amazon.com and Overstock.com to review that ruling.

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Once the states began to enact their own laws to address the taxation of remote sales, the final arbiter on the issue would have to be either the U.S. Supreme Court or Congress. The refusal of the U.S. Supreme Court to review the New York cases involving Amazon.com and Overstock.com has paved the way for Congress to act. Failing that, states will likely continue to enact such “Amazon” laws or go on losing revenue from uncollected taxes.

According to Kokinis‑Graves, the broader nexus provisions already enacted by a number of states generally fall into two categories:

• Click‑through nexus provisions generally require online retailers to collect and remit use tax if they enter into an agreement under which an in‑state person, for a commission, refers potential purchasers to the retailer, whether through an Internet‑based link or a website, provided certain total cumulative sales thresholds are met; and

• Affiliate‑nexus provisions generally require online retailers to collect use tax if they have an affiliation with a company doing business in the state.

States that have enacted one or more of these nexus provisions include: Alabama, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.

“Over the 2016 Thanksgiving holiday, including Black Friday and Cyber Monday, online retail sales climbed to almost $13 billion,” Kokinis‑Graves added. “States are going to use everything in their arsenal to enforce and collect the tax that is due.”

View an updated national map of state sales tax laws below.

WA

IDWY

ND

SD

MN

IA

KS

OK SC

NCTN

AR

MO

WIMI

PA

NY

ME

IL IN

KY

OH

WV VA

TX LAMS AL GA

FL

NE

CO

AZ NM

UTNV

CA

MT

OR

AK

HI

DC

MD

DE

NJ

CT

RI

MA

VTNH

States with sales tax that have enacted online tax laws

States with sales tax that have introduced online tax legislation

States with no sales tax

Status of State Sales and Use Tax Nexus LawsStates with sales tax that have enacted or introduced online tax laws include those with tax legislation related to click‑through nexus, affiliate nexus, website notice and/or reporting requirements, or some variation thereof.

Source: Wolters Kluwer, 2016All rights reserved.Permission for Use Granted.Last revised November 9, 2016

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Proposed Federal LegislationAlthough buyers are required to report and pay taxes on their Internet purchases, federal legislation designed to simplify the patchwork of state rules requiring online retailers to collect taxes has fallen short from being signed into law. Whether the Marketplace Fairness Act of 2015, the Online Simplification Act of 2016, or the Remote Transactions Parity Act, Congress has yet to settle the issue.

BackgroundUnder existing law, retailers nationwide are required to collect sales taxes for purchases made in states in which they have a physical presence, or nexus. But they are not required to collect the tax in states where they have no physical nexus based on a 1992 U.S. Supreme Court decision (Quill Corp. vs. North Dakota). However, the Supreme Court also noted that Congress did have the authority to change this policy and enact legislation requiring all retailers to collect sales tax.

More than two decades and many proposals later, Congress is still working on a solution.

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Business Traveler Tax Planning TipsWolters Kluwer Covers Need‑to‑know Facts for Road Warriors from Coast to Coast

(NEW YORK, NY, January 2017) — Whether their mobile office is occasionally with them on the road, in the air or while riding the rails, business travelers who work across state lines know they need to prepare a bit more when it’s time to file their tax returns. Although calls have been made to simplify the tax preparation process for those who work in multiple locations, travelers need to be aware of the local income tax laws and required forms to file in places where they regularly conduct business.

“While celebrities, artists and athletes touring the country may have teams of accounting and financial pros handling all their tax paperwork, regular business travelers who don’t operate in the public spotlight should still be aware of the local tax compliance measures where they work, which may include tax breaks they may not be aware of,” said Rocky Mengle, JD and Senior State Tax Analyst for Wolters Kluwer Tax & Accounting. “Even if you’re only working in one place for a short period of time, specific state income tax rules may still apply.”

Working in Different StatesForty‑one states and the District of Columbia impose a personal income tax on wages, and each has different rules regarding when income tax is imposed on nonresidents. Some state withholding thresholds are based on the number of days worked in the state while others are based on the wages earned in the state. For example:

• Louisiana — Requires nonresidents who must file a federal return to also file a Louisiana state tax return if they received income from state sources.

• Maine — Requires nonresidents to file a state tax return if they have enough income from state sources to trigger a state income tax liability, but there are exceptions based on the number of days spent in the state, the type of work and the amount earned.

• Massachusetts — Has different income filing thresholds for residents vs. nonresidents. The 2016 filing threshold is $8,000 for residents regardless of filing status. However, the threshold for nonresident single filers and married taxpayers filing separately is $4,400; $6,800 for head‑of‑household filers; and $8,800 for married taxpayers filing jointly (nonresident thresholds are adjusted based on the amount of income from Massachusetts sources).

Additional Business Travel Tax Facts

• Most states require residents to file income tax returns reporting all their income, regardless of whether they earned the income in that state or another state.

• Someone working in multiple states would then also file nonresident income tax returns in each state in which they met the income tax filing thresholds.

• Helping to avoid double taxation, most states allow residents to take a tax credit on their tax return for income taxes they paid to other states.

Some states also have reciprocity agreements allowing individuals to work in neighboring states without owing income taxes to the nonresident state. Overall, more than one‑third of states have reciprocity agreements with one or more other states, including:

• Illinois — Residents of Iowa, Kentucky, Michigan or Wisconsin who work in Illinois do not have to pay Illinois income taxes on their wages.

• Ohio — Residents of Indiana, Kentucky, Michigan, Pennsylvania or West Virginia who work in Ohio do not have to pay Ohio income taxes on their wages.

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• Pennsylvania — Residents of Indiana, Maryland, New Jersey, Ohio, Virginia or West Virginia who work in Pennsylvania do not have to pay Pennsylvania income taxes on their wages.

“Typically, reciprocity agreements are made with neighboring states that share borders — so they don’t apply for those working on opposite sides of the country,” Mengle added.

An exception is the District of Columbia, which does not require residents of any state to pay District of Columbia income taxes on their wages, unless they lived in the District of Columbia for at least 183 days during the year.

Most states also have special rules exempting members of the military and their families from having to file multiple state tax returns.

No Tax Reciprocity for New York City‑areaConspicuously absent from the states providing one another reciprocity are New York, Connecticut and New Jersey. As a result, workers who live in one of these states and work in another have to file nonresident income tax returns if they meet the filing thresholds. They can, however, take a tax credit for taxes paid to the other state.

Impact for 2017 Filing SeasonWithout federal tax laws in place that apply to business travelers, employees and employers need to make sure they’re following the various rules and regulations of all states where work is done. In addition to employment income, other reasons a taxpayer may need to file a nonresident state income tax return include receiving income from:• A share of a partnership, LLC or

S corporation based in another state• A trade or business in another state, such as

working as a consultant or a repairman• Rental property in another state• The sale of real estate in another state• Lottery or other gambling winnings from

another state




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Direct IRA Rollovers — Who Qualifies?Individuals age 70½ (the age at which required minimum distributions must be taken) or older who gave a tax-free, direct distribution of up to $100,000 in 2016 from their IRAs to qualifying charities would qualify. The provision benefits seniors who no longer had significant expenses, such as paying down home mortgages, to donate funds from their retirement accounts as tax-deductible charitable donations — without having to report the donated amount as retirement income or claim itemized deductions instead of the standard deduction.

“It’s a popular and now permanent win-win provision for retirees who didn’t need all the money they had saved in retirement and for charitable organizations,” said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting. “Donations below the $100,000 limit are not taxed and do not increase adjusted gross incomes (AGIs).”

Checklist for Claiming Charitable Contributions Everyone filing returns should know the basic rules checklist for claiming charitable contributions as tax deductions:

� Deductions must be included as itemized deductions — This is done on Form 1040, Schedule A.

� Donations must be for qualified charitable organizations — In order to receive a deduction, your contribution must be to a qualified charitable organization, typically given Code Sec. 170(c) status by the IRS and listed on their website. Deductions are not allowed for contributions to individuals, political organizations or unions for example.

� Proper acknowledgement, proof of donation — For any cash or property valued at $250 or more, you must have a receipt (bank record, payroll deduction or written acknowledgment) identifying the organization, the value and a description of the property. If your overall noncash contributions exceed $500, you must file IRS Form 8283, Noncash Charitable Contributions, with your return; for items valued at more than $5,000, you must also generally include an appraisal by a qualified appraiser. Deductions for cash donations of any amount require either a bank record, credit card

How to Be Charitable and Get a Tax Break TooWolters Kluwer Reviews Tax Rules for Charitable Contributions

(NEW YORK, NY, January 2017) — Writing a check, making an online pledge or donating goods to qualifying tax-exempt, charities and non-profit organizations are popular methods for earning a deduction at tax time. However, just remembering you made a donation during the year and proving it with a written record of the transaction are two different things. In addition to listing the need-to-know tax deduction guidelines on charitable and non-profit donations in the checklist below, the Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently extended the provision where IRA account holders may directly donate distributions to charities.

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statement or a receipt or another written acknowledgement from the receiver.

� Text message donations records — If you made a quick text message, charitable donation from your cell phone during the year, mobile phone bill records generally meet the record‑keeping requirement. The billing item should include the name of the charity, date of donation and amount.

� Know special rules for certain noncash donated property — For example, clothes

and household goods must generally be in good used or better condition to be tax deductible.

� Subtract any benefit you received for the value of your donation — For example, if you bid on football game tickets at a charity’s silent auction that had a listed value of $400, but you secured them with a high bid of $600, you may only deduct the amount that exceeds the fair market value — or $200.




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Where Multi‑National Companies Place Their Profits Is About to Become Much More TransparentWolters Kluwer Reports on the Rise of Country‑by‑Country Reporting

(NEW YORK, NY, January 2017) — On June 29, 2016 the U.S. Treasury released final country-by-country (CbC) transfer pricing reporting regulations for certain companies in the United States. These were issued as a response to the effort by the Organization for Economic Co-operation and Development (OECD) to address base erosion and profit shifting (BEPS) by multinational entities (MNEs) to reduce and avoid taxes. Other developed countries are also adopting similar requirements.

The final regulations will require CbC reporting by U.S. multinational entities that have annual revenues of $850 million or more. Form 8975 must be filed with the ultimate parent entity’s income tax return for the taxable year.

“In response to several comments, the IRS recognized the need for it to accept CbC reports for tax years beginning on or after January 1, 2016, even though those reports would not be due in the U.S. until the following year,” said Joy Hail, International Tax Analyst for Wolters Kluwer Tax & Accounting. “If the IRS had not done this, some U.S. MNEs may have found themselves subject to multiple CbC filing obligations.”

The reporting requirements include a jurisdiction-by-jurisdiction breakdown of revenues, profits, taxes paid, number of employees and amount of fixed assets. The goal is to give the tax departments of the concerned countries, including the IRS, the information they need to determine if profits have been improperly shifted to other lower tax jurisdictions.

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The Tax Implications of Brexit Wolters Kluwer Reports on the Status of Britain’s Withdrawal from the European Union

(NEW YORK, NY, January 2017) — The term “Brexit” is shorthand for Britain exiting from the European Union (EU). On June 23, 2016, the United Kingdom voted to leave the EU. With voter turnout at 72.2 percent — the highest in recent history — 51.9 percent voted to leave the EU while 48.1 percent voted to remain. This exit will take approximately two years and will impact the corporate tax landscape in the UK.

As a result of the referendum, Prime Minister David Cameron resigned and Theresa May was elected as the new prime minister. Prime Minister May has announced that she hopes to formally notify the EU of Britain’s intent to withdraw by the end of March 2017.

The transition will be phased in. Until then, multinationals doing business in the UK will continue to operate under current arrangements. Some of the same concerns about the impact of globalization that led to Brexit also played a role in the election of Donald Trump as President in the United States in November 2016. Just as President Trump is proposing significant changes in the international tax system of the U.S., Brexit promises to give Britain more flexibility free from EU directives in implementing its own international tax policies. In the U.S., however, Brexit may not run as smoothly as some have hoped.

“In January 2017, the British Supreme Court ruled that any exit from the EU must be supported by an Act of Parliament,” said Joy Hail, International Tax Analyst for Wolters Kluwer Tax & Accounting. “Although it appears likely that Parliament would line up with the Brexit vote and act to support the exit from the EU, this additional requirement for Parliament’s involvement is likely to upset Prime Minister May’s timeline for formally notifying the EU of Britain’s intent to leave.”

Potential Outcomes As a result of Brexit, Britain will likely need to push for a comprehensive free trade agreement, just as President Trump is pushing to revise U.S. trade agreements. UK businesses will potentially face new tariff and non-tariff barriers when doing business in the EU and vice versa — a risk also faced by the U.S. with President Trump’s trade proposals. In addition, the UK’s participation in EU trade deals would cease. This will mean that UK businesses will face new barriers — both tax and non-tax — to non-EU markets, until new deals are negotiated.

With regard to taxes, Britain will be free to set its own value-added tax rates, potentially leading to broad changes in this area. In terms of international taxation, Britain would be free to take its own position on the Organization for Economic Co-operation and Development’s Base Erosion/Profit-Shifting

(BEPS) project, independent of the directives issued by the European Commission, although it would still be accountable to the international community, similar to the position of the U.S.

Upcoming Key Brexit Dates• March 31, 2017: Deadline Prime Minister May

has set for invoking Article 50 by notifying the European Council of Britain’s intention to leave the EU

• September 30, 2018: Date by which EU’s chief Brexit negotiator, Michel Barnier, wants to wrap up terms of Britain’s exit from the Union

• March 31, 2019: Date by which Prime Minister Theresa May wants to wrap up negotiations over Brexit

• May 2019 (Tentative): Britain formally exits the EU, following ratification of Brexit by all other member states

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Simplifying Estate and Gift Tax PlanningWolters Kluwer Updates Key Federal and State Estate and Gift Tax Rules

(NEW YORK, NY, January 2017) — The 2017 year is shaping up to be a hot one for tax legislation, and federal estate and gift taxes may be among the targets for big changes. Both President Trump and Republican leaders have expressed their opposition to these taxes. However, until Congress acts, the law as it has existed for the past several years remains in effect, with the changes noted below.

Updates for 2017 Estate and Gift TaxesThe inflation‑adjusted lifetime estate tax exclusion amount for decedents dying and gifts made for 2017 taxes is $5.49 million — meaning that estates valued at that amount or lower are excluded from estate taxes (up from $5.45 million for 2016). As a result, the estates of a married couple could potentially exempt twice as much, up to $10.98 million from estate or gift taxes for 2017 transfers.

The annual gift tax exclusion remains at $14,000 for 2017, as it was in 2016; permitting tax‑free gifts of up to $14,000 per donee or $28,000 per couple using gift splitting.

Prior to the 2016 election, some lawmakers, as well as the Obama Administration, were looking at ways to close perceived “loopholes” in current estate and gift tax laws. For example, the Administration’s annual revenue proposals had targeted grantor retained annuity trusts (GRATs) and rules allowing the basis of a decedent’s assets to be “stepped up” to their date‑of‑death value for income tax purposes. And, in August 2016, the IRS proposed administrative rules that would have greatly restricted the ability to achieve valuation discounts when transferring interests in family‑owned entities. However, following the election it appears these proposed legislative and regulatory changes are in limbo.

“Despite comments from the Trump Administration and some congressional leaders vowing to do away with the estate tax, many questions remain unanswered,” said Bruno Graziano, JD, MSA and Senior Estate Tax Analyst for Wolters Kluwer Tax & Accounting. “For example, as was the case with the 2001 legislation to repeal the estate tax, would

such repeal include a ‘sunset’ provision and would the gift tax remain in place? In addition, President Trump’s proposals also mentioned a capital gains tax on inherited assets. Would this system work as it does in Canada where the tax is imposed at death, or would it be imposed only when the assets are sold? These are all questions that will remain unanswered until we see legislative language.”

State Estate Tax DevelopmentsAlthough many states have historically based their estate tax laws on the federal estate tax, some states have passed their own “stand‑alone” estate tax laws as a way of holding onto tax revenues. They include Connecticut, Delaware, Hawaii, Maine, Minnesota, New York, New Jersey, Oregon, Rhode Island, Vermont and Washington State. Several other states still have pick‑up taxes that seemingly would apply, but because their laws remain geared to the repealed federal credit for state death taxes, no taxes are collected under these laws.

Eight states have no estate tax at all: Arizona, Georgia, Indiana, Kansas, North Carolina, Oklahoma, South Dakota and Texas. Other states, such as California and Florida technically still have a tax on the books, but their taxes are based on the now‑repealed federal credit for state death taxes and it is highly doubtful that the federal credit will ever be reinstated. Consequently, those states do not tax the transfer of an estate either.

In addition to estate taxes, six states also collect an inheritance tax. This is a tax on the portion of an estate received by an individual. It is different from an estate tax, which taxes an entire estate before it is distributed to individual parties. These states are Iowa,

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Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Assets transferred to a spouse are exempt from inheritance taxes and some states exempt assets transferred to children and close relatives.

Maximum Rate ImpactWhen the American Taxpayer Relief Act (ATRA) of 2012 was signed into law, it implemented a permanent maximum estate tax rate of 40 percent. It also provides an exclusion from estate taxes of up to $5 million dollars (indexed for inflation), as well as other changes.

The maximum federal estate, gift, and generation‑skipping transfer (GST) tax rate increased to 40 percent (up from 35 percent); the $5 million inflation‑adjusted exclusion available since passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 remains intact; and portability, which allows a surviving spouse to use the unused portion of his or her deceased spouse’s gift and estate tax exclusion and has been available to estates since 2011, is now permanent.

Without ATRA, the estate tax would have returned to a maximum rate of 55 percent; with a 5‑percent surtax applied to large estates (i.e., those in excess of $10 million up to $17,184,000), the exclusion would have been $1 million (not adjusted for inflation), and portability would have been repealed.

Rules for Surviving Spouses and PortabilityUnder ATRA rules, surviving spouses are eligible for the benefits offered by portability knowing that those benefits will not be going away. However, in order to take advantage of portability the estates of married decedents must decide whether they want to file a federal estate tax return (Form 706), even if one would not otherwise have been required.

For example, if one spouse died in 2017 after using only $2.5 million of his exclusion for lifetime gifts, his wife would still have her $5.49 million exclusion (or a higher amount depending on the inflation adjustment in the year of her death) as well as the remaining $2.99 million of her husband’s exclusion, which

is not indexed for inflation beyond the year of his death. The remaining exclusion would also be available to the surviving spouse for gift tax purposes.

“Not only did the law create a new permanent top tax rate, it also made portability permanent,” Graziano added. “While the permanency of portability may cause some decedent’s estates to consider filing an estate tax return to claim portability, many estate planners believe more traditional strategies may be more effective. Also, the estate tax return (Form 706) is very lengthy, with multiple schedules and involves valuation issues and complex tax laws that can make it very cumbersome and expensive to complete.”

Additional Key Points on Estate Taxes and Portability

• Estates have up to 9 months after a person dies to file an estate tax return, but can, and often do, request a six‑month extension.

• Estates that fall below the exclusion amount are not required to file Form 706, but they must do so in order to make the portability election.

• Portability amounts are not indexed for inflation that occurs after death. As a result, a spouse who survives considerably longer could see assets worth $3 million, for example, more than double. Accordingly, any amount in excess of the then available estate tax exclusion could now be subject to tax at 40 percent.

• If a spouse remarries or has additional children, he or she can decide where the property will go; which may not be the same intentions of the decedent spouse.

• Assets are not protected from creditors.

“Despite the addition of portability, at least some estate planners still favor using traditional credit shelter trusts to address these issues,” Graziano added. “But establishing and maintaining such trusts can also present certain costs.”

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Tax Complexity Can Be Your Friend and Help You Reduce Your TaxesWolters Kluwer Reviews Steps to Consider for Next Tax Season

(NEW YORK, NY, January 2017) — It’s never too early to start tax planning, especially if you find yourself owing more to the IRS than you thought. Taxes can be very simple if you just report your income and pay the related tax. The complexity usually comes from those tax provisions that help you reduce your taxes. There are several ways to help minimize taxable income by focusing on “tax-favorable” ways to allocate funds that are beneficial for both tax planning and for savings.

“Making new investments in retirement, education and health care accounts can really bring down the amount of your income that’s subject to taxes,” said Mildred Carter, JD and Senior Federal Tax Analyst for Wolters Kluwer Tax & Accounting. “If you are not benefitting from tax breaks with current investments, it may be worth looking at other options that encourage savings and can be beneficial for tax planning.”

Checklist of Tax‑friendly Investment Options For taxpayers looking to get the most out of their investments, the following options may lower current taxes owed, allow investments to grow tax-free or a combination of both.

� Maximize 401(k) matching contributions — If your employer offers matching 401(k) contributions, contributing to the maximum matched amount is a great first tax‑savings investment step.

“If your employer matches three percent of your contribution, that’s free money to you as well as a significant amount of tax-free savings that many people may have a hard time putting aside on their own,” said Carter.

Roth 401(k)s also have increased in popularity. Like traditional 401(k)s, money grows tax-free. However, unlike traditional 401(k)s, individuals pay taxes on the initial contribution rather than on the gains at future distribution. Additionally, while traditional 401(k)s have required minimum distributions (RMDs) starting at age 70½, Roth 401(k)s do not have RMDs.

“Even with higher current taxes, contributing to Roth 401(k)s can be a good

choice, especially for younger individuals who anticipate the value of their accounts will appreciate considerably over time,” Carter added.

The maximum amount an employee can contribute to a 401(k) remains unchanged for 2016 and 2017 — up to $18,000 and $24,000 for those age 50 and over. The same rules apply for 457 and 403(b) retirement plans.

� Contribute to an IRA — Both traditional IRAs and Roth IRAs allow contributions to grow tax free. The maximum contribution also remains the same for 2016 and 2017 — $5,500 for those under age 50. A $1,000 catch‑up contribution also is allowed in each year for taxpayers 50 and older.

Contributions to traditional IRAs are tax deductible.

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contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:

• More than $98,000 but less than $118,000 ($99,000 to $119,000 for 2017) for a married couple filing a joint return or a qualifying widow(er)

• More than $61,000 but less than $71,000 ($62,000 to $72,000 for 2017) for a single individual or head of household

As with Roth 401(k)s, contributions to Roth IRAs are not tax deductible, but there are no taxes on capital gains on distribution and no RMDs. The AGI restriction for Roth IRAs in 2016 for single filers is $117,000 phasing out at $132,000 ($118,000 to $133,000 for 2017). The restriction for married taxpayers filing jointly in 2016 is $184,000 phasing out at $194,000 ($186,000 to $196,000 for 2017).

Taxpayers have until April 18, 2017 to make an IRA contribution for 2016.

� Contribute to a 529 education savings plan — Named after Section 529 of the Internal Revenue Code which created these plans in 1996, 529 plans allow you to make after‑tax contributions to pay for college costs for your child or other family members. The contributions grow tax‑deferred and the funds can be withdrawn tax free if used for qualified college tuition and other expenses.

Nearly every state operates a plan as well as many educational institutions. In most instances, the state plan you select does not limit your choice of schools. For example, a resident in Illinois can invest in a California plan and send the student to a university in New York. The amount put into a 529 plan may be tax deductible under some state income taxes and distributions for qualified tuition and expenses are not taxed.

Additionally, while a beneficiary has to be named in order to open a 529 plan, the beneficiary can be changed to another family member at a later date. For example, if the initially designated beneficiary earns scholarships or chooses not to go to college, a different family member can be named beneficiary.

“Because 529 plans are funded with after-tax dollars, you don’t have immediate tax savings, but avoiding future taxes on capital gains and dividends means you’ll have saved more to cover education costs,” said Carter.

� Contribute to an HSA — High‑deductible health plans continue to increase in popularity as people look to lower their monthly health care premiums. Taxpayers with these plans also can open Health Savings Accounts (HSA) and make pre‑tax contributions and take tax‑free distributions for qualified medical expenses for themselves and their families. These distributions can be made at any time, for example, they could be made to pay for qualified expenses in the near‑term or saved to cover health care expenses in retirement.

In order to be a high-deductible health plan under IRS standards, for 2016 the plan must have a minimum annual deductible of $1,300 for individual coverage or $2,600 for family coverage (same for 2017).

For 2016, the maximum amount you can contribute to an HSA is $3,350 (increased to $3,400 for 2017) for individuals and $6,750 (same for 2017) for families. Those who reach age 55 by the end of the tax year are eligible for a catch-up contribution of $1,000. Contributions cannot be made by someone enrolled in Medicare.

As with IRAs, taxpayers also have until April 18, 2017 to make their 2016 HSA contributions.

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Tax Reform Legislation Just Around the CornerWolters Kluwer Compares Trump and Ways & Means Committee Tax Proposals

(NEW YORK, NY, January 2017) — The 2016 election results putting in place a Republican Administration and a Republican-controlled Congress make tax reform much more likely in 2017. President Trump outlined some tax proposals during his campaign, and the House Ways & Means Committee proposed a tax reform outline in June, 2016. These are likely to be the starting points for tax reform legislation in 2017.

“If past history is any example, the final tax reform product — if there is a final product — will, due to the necessary process of compromise and budget restraint, differ in many respects from either of these proposals and will contain a few surprises,” said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting.

The following is a comparison of the key provisions of each of those two proposals.

Trump Ways & Means CommitteeIndividual marginal rates 12, 25, and 33% 12, 25, and 33%

Standard deduction $15,000 single$30,000 joint

$12,000 single$24,000 joint$18,000 head of household

Exemptions Eliminate Eliminate

Filing status Eliminate head of household No change

Capital gains/Dividends/Interest No change 50 percent exclusion

Itemized deductions Cap $100,000 single$200,000 joint

Retain only charitable contribution deduction and mortgage interest deduction

Individual AMT Eliminate Eliminate

ACA taxes:• 3.8% net investment income tax• 0.9% additional Medicare tax• “Cadillac” tax• Medical device excise tax

Repeal Repeal

Child tax credit No provision Increase to $1,500

Child care New above‑the‑line deduction

New dependent care savings accounts

No provision

Education No provision Streamline benefits

Retirement No provision Reform savings options

Top corporate tax rate 15% 20%

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Trump Ways & Means CommitteeBusiness income tax rate 15% 25%

Corporate AMT Eliminate Eliminate

Capital investments/Interest Immediate expensing if no interest deduction

Immediate expensing; deduct interest to extent of interest income

Code Sec. 179 expensing Double to $1 million No provision

Corporate tax breaks Eliminate corporate tax expenditures except R&D credit

Preserve R&D credit

Net operating losses No provision No carrybacks, indefinite carryforward

International tax reform No provision Move to territorial tax system

Border adjustment tax

Unrepatriated earnings 10% tax 8.75% on cash3.5% on other

Estate tax Repeal, with stepped‑up basis for gains over $10 million

Repeal

Gift tax Repeal No provision




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2016–2017 Tax BracketsMarried Filing Jointly (& Surviving Spouse)

2016 Taxable Income Tax Rate 2017 Taxable Income Tax Rate

Not over $18,550 10% Not over $18,650 10%

$18,551–$75,300 15% $18,651–$75,900 15%

$75,301–$151,900 25% $75,901–$153,100 25%

$151,901–$231,450 28% $153,101–$233,350 28%

$231,451–$413,350 33% $233,351–$416,700 33%

$413,351–$466,950 35% $416,701–$470,700 35%

Over $466,950 39.6% Over $470,700 39.6%

Married Filing Separately


Not over $9,275 10% Not over $9,325 10%

$9,276–$37,650 15% $9,326–$37,950 15%

$37,651–$75,950 25% $37,951–$76,550 25%

$75,951–$115,725 28% $76,551–$116,675 28%

$115,726–$206,675 33% $116,676–$208,350 33%

$206,676–$233,475 35% $208,351–$235,350 35%

Over $233,475 39.6% Over $235,350 39.6%

Single Filers


Not over $9,275 10% Not over $9,325 10%

$9,276–$37,650 15% $9,326–$37,950 15%

$37,651–$91,150 25% $37,951–$91,900 25%

$91,151–$190,150 28% $91,901–$191,650 28%

$190,151–$413,350 33% $191,651–$416,700 33%

$413,351–$415,050 35% $416,701–$418,400 35%

Over $415,050 39.6% Over $418,400 39.6%

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Graphs

Head of Household


Not over $13,250 10% Not over $13,350 10%

$13,251–$50,400 15% $13,351–$50,800 15%

$50,401–$130,150 25% $50,801–$131,200 25%

$130,151–$210,800 28% $131,201–$212,500 28%

$210,801–$413,350 33% $212,501–$416,700 33%

$413,351–$441,000 35% $416,701–$444,550 35%

Over $441,000 39.6% Over $444,550 39.6%

Standard Deduction Amounts

Filing Status 2016 2017 Increase

Married Filing Jointly (& Surviving Spouse) $12,600 $12,700 $100

Married Filing Separately $6,300 $6,350 $50

Single $6,300 $6,350 $50

Head of Household $9,300 $9,350 $50

Standard Deduction for Dependents (“Kiddie” Standard Deduction)

2016 2017 Increase

$1,050 $1,050 $0

Income Level at Which 3‑Percent Itemized Deduction Limitation Takes Effect (Adjusted Gross Income)

Filing Status 2016 2017

Married Filing Jointly (& Surviving Spouse) $311,300 $313,800

Married Filing Separately $155,650 $156,900

Single $259,400 $261,500

Head of Household $285,350 $287,650

Personal Exemption Amounts

2016 2017 Increase

$4,050 $4,050 $0

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Threshold for Personal Exemption Phase‑out




Single $259,400 $261,500


Gift Tax Exemption

2016 2017 Increase

$14,000 $14,000 $0

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Threshold for Personal Exemption Phase‑out




Single $259,400 $261,500


Gift Tax Exemption

2016 2017 Increase

$14,000 $14,000 $0

Educational Tax Breaks Available for StudentsWolters Kluwer Updates Qualifying Credits, Deductions

(NEW YORK, NY, January 2017) — Students and families looking for education-related tax break opportunities have plenty to pick from if they know what’s available and where to look. Many tax provisions for saving on tuition and other school-related expenses remain in effect for those who qualify. The following information and tables include current education tax break updates and savings plan information.

Comparing Tax Credits Two popular education tax breaks are The American Opportunity Tax Credit (AOTC), which provides up to a $2,500 credit for qualifying educational costs, and the Lifetime Learning Credit. The table below examines specifics and qualifications for each:

American Opportunity Tax Credit Lifetime Learning Credit

What it is An enhanced Hope Credit of up to $2,500 per student per year for the first four years of post‑secondary qualified tuition and expenses. This credit has been made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015.

A credit of up to $2,000 per return based on expenses for post‑secondary education or courses to improve job skills.

Credit amount 100% of the first $2,000 of qualified tuition and related expenses plus 25% of the next $2,000. Use Form 8863, Education Credits.

20% of the first $10,000 in qualifying expenses, to a maximum $2,000 credit. Use Form 8863, Education Credits.

Qualifying expenses

Qualified tuition and related expenses, including expenditures for course materials, such as books, supplies and equipment.

Tuition, student activity fees and course‑related fees paid directly to the educational institution.

Credit phase‑out ranges

Modified adjusted gross income (MAGI) is $80,000–$90,000 for single filers, $160,000–$180,000 for joint returns.

Up to 40% of the credit amount is refundable if the taxpayer’s tax liability is insufficient to offset the nonrefundable credit amount.

These numbers are not subject to inflation adjustment.

MAGI limits are $55,000–$65,000 for single filers for 2016 ($56,000–$66,000 for 2017) and $111,000–$131,000 for joint returns ($112,000–$132,000 for 2017).

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American Opportunity Tax Credit Lifetime Learning Credit

Who can/can’t claim it

Can’t be taken if married filing separately.

Can’t be taken by student claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

Student must be enrolled in program leading to degree or other recognized credential, studying at least half‑time.

Can’t be used for graduate or professional level programs or by anyone with a felony conviction for a state or federal drug offense.

Cannot be claimed by the student if he or she has unearned income subject to the “kiddie tax.”


Can’t be taken by a student if claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

What to watch out for

Can’t be taken if Lifetime Learning Credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell Educational Savings Account (Coverdell ESA) or qualified tuition program (529 plan), but not for same expenses.

Can be taken for expenses paid for with student loan.

Credit applies per student.

Can’t be taken if American Opportunity Tax Credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or 529 plan, but not for same expenses.


Credit applies per return.

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‘Above‑the‑line’ Deductions The Tuition and Fees and Student Loan Interest Deductions are compared below.

Tuition and Fees Deduction Student Loan Interest Deduction

What it is A deduction from gross income of up to $4,000 ($2,000 if modified adjusted gross income (MAGI) exceeds $65,000 or $130,000 for joint filers; no deduction if MAGI exceeds $80,000 and $160,000, respectively) based on expenses for post‑secondary education. This deduction is not available after December 31, 2016.

A deduction from gross income of up to $2,500 based on interest paid on a student loan for post‑secondary education.

Deduction amount 100% of the first $4,000 ($2,000 if MAGI exceeds $65,000 for single filers ($130,000 for joint filers) in qualifying expenses.

Taken on Form 1040A or 1040.

100% of the first $2,500 in qualifying expenses.

Taken on Form 1040A or 1040.

Qualifying expenses Tuition, student activity fees and course‑related fees paid directly to the educational institution.

Loan may cover books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, student activity fees and course‑related fees paid directly to the educational institution. Interest payments are deductible for the entire period of the loan.

Deduction phase‑out ranges

Full deduction is only allowed if MAGI is not greater than $65,000 for a single filer, $130,000 for joint filers.

For taxpayers whose income exceeds $65,000 but not $80,000 may claim $2,000 deduction; for individuals filing jointly whose income exceeds $130,000 but does not exceed $160,000 may claim a $2,000 deduction. Taxpayers whose income exceeds $80,000 and $160,000 are denied the deduction. These numbers are not inflation adjusted.

For 2016, MAGI is $65,000–$80,000 for a single filer (same for 2017), $130,000–$160,000 for joint filers ($135,000–$165,000 for 2017).

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Tuition and Fees Deduction Student Loan Interest Deduction


Can be taken by qualifying individuals including themselves, a spouse or a dependent.


Can’t be taken if claimed as dependent on another person’s return, but parent can claim credit for child’s expenses.

Deduction may be taken even for voluntary payment of interest.

Must have been in degree program and at least half‑time student to take the deduction.


Can’t be taken if claimed as dependent on another person’s return.

Can be taken only by the person who is responsible for the loan and who actually makes the payments.


Can’t be taken if AOTC or Lifetime Learning Credit is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or qualified tuition program (529 plan) but not for same expenses.


Deduction is not available on Form 1040EZ.

Deduction is taken on Form 8917, Tuition and Fees Deduction.

Must reduce qualified educational expenses by the total amount paid through tax‑free sources, such as tax‑free withdrawals from Coverdell ESAs.

Deduction is not available on Form 1040EZ.

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529 Educational Savings Plans, Coverdell Accounts Below are tax break comparisons between Coverdell education savings accounts (Coverdell ESAs or ESAs) and 529 college savings plans (529 plans), also referred to as qualified tuition programs (QTPs).

Coverdell Education Savings Account (ESA)

Qualified TuitionProgram (529 Plans)

What it is A savings account for educational expenses in which earnings grow tax‑free. Withdrawals also are tax free if used to pay for qualified educational expenses.

Three general types of 529 plans exist:

• Pre‑paid tuition plans — generally guaranteeing future tuition coverage at a state university.

• State 529 college savings plans — generally sponsored by a state, allowing you to use saving plan proceeds to attend a state or private university.

• Independent 529 plans — sponsored by a consortium of private colleges, whereby you can lock in current tuition rates for future years at participating schools.

In each savings program, investment earnings are not taxed if withdrawals are used for qualified expenses.

Contributions to state‑sponsored programs are partially or fully deductible on some state tax returns.

Contribution limits $2,000 maximum annual contribution per year per beneficiary.

As with IRAs, contribution can be made up to the tax filing deadline which is April 18, 2017 for most states.

Can contribute to both a Coverdell ESA and a qualified tuition plan in the same year.

Contributions cannot be more than is necessary to provide for the higher education expenses of the beneficiary. These amounts are set by the state or educational institutions sponsoring the plan and may be in excess of $400,000 in some states such as Ohio, Pennsylvania and Wisconsin. In the case of many 529s, accounts can be opened with as little as $25 and contributions as little as $15 per pay period.

There are no other specific annual contribution limits for the plans.

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Qualifying expenses Can be used to pay for tuition, fees, books, supplies and equipment for both K‑12 and post‑secondary.

For K‑12, can also pay for uniforms, transportation, supplementary items and services such as extended day programs, room and board, and purchase of computer technology and Internet access (but cannot be used for sports, games or hobby software unless it is predominantly educational).

For post‑secondary education, can cover expenses for room and board if the student is enrolled at least half‑time and the amount meets certain guidelines. Can also be used to fund a qualified tuition program.

Distributions can be used for accredited post‑secondary books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, and student activity fees and course‑related fees paid directly to the accredited post‑secondary educational institution.

Expenses related to the cost of computer equipment, technology or Internet access are not considered qualifying expenses for excluding qualified tuition plan distributions from gross income.

Contribution phase‑out ranges

The phase‑out ranges from modified adjusted gross income (MAGI) of $95,000–$110,000 for single filers, $190,000–$220,000 for joint filers; no phase out for corporation or other entities, including tax‑exempt organizations. These numbers are not subject to inflation adjustment.

No income limitations.


Beneficiary must be younger than 18 years old or be a special needs beneficiary in the year contributions are made.

Anyone can set up an account for a beneficiary as long as the annual contribution limits for that beneficiary are not exceeded.

Someone funding a qualified tuition program for another individual can use the annual gift tax exclusion or combine five years’ worth of exclusions in a single year. The beneficiary can exclude funds withdrawn from the qualified program from income if they are used for qualified expenses.

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Beneficiary is taxed on any withdrawals not used to pay for qualified educational expenses. (Penalty‑free withdrawals can be made in connection with service academy appointments, e.g., Annapolis or West Point.)

All funds must be withdrawn by the time beneficiary reaches age 30 (except if special needs individual), but an account can be transferred from one beneficiary to another.

All contributions must be made in cash.

As with a conventional IRA, owner of the account can exercise wide discretion as to investments. The funds, however, cannot be used to reimburse the taxpayer for home schooling.

Check tax treatment of contributions for state income tax purposes.

Limited ability to change investment options.

Possible 10% penalty if distributions are not used for qualified expenses.

Beneficiary can be changed if new beneficiary is a member of the same family.

Penalty‑free withdrawals can be made in connection with service academy appointments, such as Annapolis or West Point.

Exclusions Several exclusions also are available for taxpayers related to education:

• Bond interest: All or part of the interest on proceeds of qualified savings bonds (specifically, Series I bonds or qualified Series EE bonds issued after 1989) cashed to pay education expenses. For 2016, MAGI eligibility phase‑out ranges are $77,550–$92,550 for single filers, $116,300–$146,300 for joint returns.

• Employer assistance: For 2016 tax filing, employer‑provided educational assistance (up to $5,250 annually) can be excluded from income for undergraduate or graduate level coursework and expenses

• Scholarship funds: Scholarship money or tuition reduction from income up to the amount spent on qualified expenses; generally cannot claim exclusion if scholarship or tuition reduction represents payment for teaching, research or other services. There is also an exclusion for Armed Forces and National Health Service Corps scholarship programs.

• Student loans: The amount of a cancelled student loan is also excluded from gross income. (Normally, a cancellation of indebtedness counts as income.) The discharge must be made under the terms of a loan agreement and made because the person works for a specified period in certain professions for certain kinds of employers — for example, as a doctor or nurse in underserved areas.

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Average Itemized Deductions(Data Based on Preliminary 2014 IRS Statistics)

Based on the latest IRS statistics, itemized deductions were claimed on only 29 percent of all tax returns filed but represented an estimated 57 percent of the total deductions. The average for total itemized deductions (after limitation) was $26,374, a 3.2-percent increase from the average of $25,568 for 2013.

The following are preliminary figures released by the IRS (their reports lag behind the current tax year because of the time needed to compile figures). These are averages only. The IRS cautions taxpayers that they should not base their claimed deductions on these figures.

The numbers are useful, however, for two purposes: 1. to see if your actual deduction is out of line (so you can take extra care to document your

claim); and 2. to see if the deductions meet the expectations of policymakers.

Also, note that these averages take into account only those individuals who claimed an itemized deduction for that type of expense. Zero deductions are not factored in. Thus, the “average” taxpayer with adjusted gross income between $50,000 and $100,000 did not take an “average” medical expense deduction of $9,614, only the “average” taxpayer who itemized and claimed a medical expense deduction did.

Medical Expenses Taxes Interest

CharitableContributions

under $15,000 $8,787 $3,566 $7,129 $1,427

$15,000–$30,000 $8,477 $3,376 $6,619 $2,339

$30,000–$50,000 $8,209 $4,098 $6,511 $2,594

$50,000–$100,000 $9,614 $6,679 $7,553 $3,147

$100,000–$200,000 $11,122 $10,983 $9,147 $4,130

$200,000–$250,000 $18,092 $17,763 $11,642 $5,786

$250,000 or more $38,992 $50,679 $16,982 $21,596

Source: Wolters Kluwer, 2017Permission for use granted.

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Avoiding an Audit(or making it less painful if you do get audited)

Be aware: The IRS has resumed its practice of conducting random audits as a way to evaluate its audit selection criteria. Burdensome complete audits of taxpayers are rare. Random selection, however, makes these audits hard to avoid.

Here are some automatic problems:

Missing information • The IRS will contact you if you omit identifying information or information required to compute your tax. Missing Social Security Numbers are typical (including the Social Security Numbers of dependents and ex‑spouses who are receiving alimony from you).

• This probably doesn’t change your odds of a real audit unless you can’t or won’t comply with the IRS request to supply the information or there is something else glaringly wrong with the return. If all goes well, your return will just go back into the “pile” to await possible selection in the normal audit “lottery.”

Math error procedures • If the return contains a math or clerical error, the IRS may assess and send a notice of additional tax due without following the normal tax deficiency procedures. Congress has extended this power to certain other omissions and claims on a return that one would not normally think of as math or clerical errors.

• If you are claiming certain credits that require a Taxpayer Identification Number (TIN) on the tax return, make sure the information that the TIN issuer has is correct. If there is a discrepancy between the number you provide, and that provided to the IRS by the TIN issuer (such as the Social Security Administration), the IRS will assume that the information provided by the TIN issuer is valid and treat your return as if you omitted a valid number. The IRS can then use the math error procedure to summarily assess any additional taxes due as a result of the disallowed credits.

Items not to claim The IRS will automatically disallow the following as contrary to law:• losses on the sale of your home or personal property;• surviving spouse filing status for more than two years;• medical deduction for (a) unnecessary cosmetic surgery, (b) funeral expense,

(c) diet foods;• itemized deduction for the following taxes (a) FET on tires, (b) car registration

(vehicle tax based on value is deductible), (c) import duties (and others);• personal interest expense deduction (except on a qualified home mortgage);• personal insurance expense deduction, except medical, long‑term care,

mortgage; and• moving expense deduction in excess of legal limit.

Married filing separately • Both must itemize or both must take the standard deduction.


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W‑2s, 1098s and 1099s • Make sure you report the exact numbers you get on your W‑2 wage statement 1098 for mortgage interest and 1098‑T for education expense or 1099 statements of interest, mutual fund gains, dividends, stock basis, gambling winnings, pensions, etc. The IRS can match these to your return and a discrepancy can trigger an audit.

• If you get a W‑2, 1098 or 1099 that is in error, immediately try to have a corrected form filed. Discrepancies between information on your return and tax forms are a red flag for the IRS.

• If you are required to divide the numbers up between various lines on your return or the numbers are wrong, be sure you can explain (and get the issuer of the statement to correct errors).

The IRS has access to a lot of information beyond your return and beyond W‑2s and 1099s. For example:

Partnerships, S corporations, trusts

• Make sure your return is consistent with the return of any partnership or S corporation you are a part of; any trust you receive income from, etc.

Prior dealings with the IRS

• If you have been audited before, the IRS will remember. Don’t repeat past mistakes.

• If you have requested a ruling from the IRS, make sure your return is consistent with the ruling — unless you want to go to court on the issue.

Tax items that affect more than one year

• If you took depreciation on a piece of property and you’ve now sold it, make sure that the gain or loss you report this year is consistent with the costs and write‑offs you reported in previous years.

Here are some common problems that could come up if you are audited:

If you own rental property

• If you live on the premises, do you keep personal and business expenses separate (including depreciation)?

Job‑related expenses (unreimbursed)

• Do you have proper records?

• Did you properly deduct meals and entertainment expenses (usually 50% is allowed)?

• If you used a car or computer (or other property) partly for work and partly for pleasure, did you deduct only the work portion of the expense?

Job‑related expenses (reimbursed)

• There shouldn’t be a deduction unless the reimbursement failed to cover the expense.

• Was the reimbursement under an “accountable plan” maintained by your employer? Did you have to give the records to your employer and was the reimbursement limited to the expense, as required?


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Tips • Are you in an occupation that normally receives tips (waiter, cab driver, porter, beautician)? The tips you report should be reasonable, given the type of job and the hours you devote to it.

Unusually large interest expense

• Are you taking a large interest deduction without the apparent funds to repay the loan? The IRS will suspect you are receiving income without reporting it.

Foreign Asset Reports (FATCA and FBARs)

• Did you indicate on Form 1040 Schedule B, line 7a that you have a foreign account and fail to timely file the FBAR FinCEN Report 114? Did you have foreign assets that you failed to include on Form 8938? The IRS will suspect that you are hiding foreign income. Substantial penalties can apply.

Health Care • Have you properly calculated any premium assistance credit and whether you are subject to a penalty for failure to obtain health insurance, and do you have the documentation to support them?

The IRS is currently focusing its limited audit resources on offshore income and assets; high‑risk/high‑income taxpayers; small businesses; abusive tax shelter schemes and their promoters; non‑filing by high‑income taxpayers; unreported income; and tax exempt entities.

If you have a business, here are some items the IRS looks for:

Completed returns prepared by professionals

• A return that is complete, has all schedules in place and is prepared by a professional is less likely to be audited. (The IRS does rely on your accountant’s unwillingness to do certain improper things.)

Related corporations have higher audit risk

• Don’t think you can put one over on the IRS by creating multiple corporations. Groups of corporations under common control are more likely to be audited.

Small businesses • Small businesses tend to lack “internal controls” — accounting systems that the IRS can rely on.

• If you are worried about being audited some day, put a good accounting system in place today. And stick to it. The IRS will take that as a sign that you are making an effort to comply.

The IRS will know your business

• IRS auditors are becoming more knowledgeable about your specific business. (The MSSP program is part of this.) They will know what to expect on your return and what is bogus. The restructuring of the IRS into units that serve groups of taxpayers with similar needs (individuals, small businesses, large businesses and tax exempts) is improving the agency’s ability to scrutinize taxpayer activity.

Fringe benefits • There are strict rules for health insurance, life insurance and pensions to assure that the expense is a business expense and not a personal expense solely for the welfare of your family.

Credit card and Internet payments

• Credit card and Internet payment processors are now required to report payments on Form 1099‑K. Make sure the tax return reflects those amounts.


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Employment taxes • The IRS takes a dim view of classifying employees as “independent contractors,” just to avoid withholding taxes and other obligations.

• If the IRS finds that you’ve issued a lot of 1099s rather than W‑2s (or worse — you didn’t issue any statements but attempted to deduct the expense) for this kind of work, you’d better be on solid ground for your “independent contractor” classification, or the IRS will sock you for a lot of back tax and penalties.

• A growing concern for the IRS is companies’ attempts to avoid liability for employment taxes for independent contractors by maintaining the employee works for the customer, not the company. Although recent cases have upheld the classification of certain employees as independent contractors without the filing of 1099s, the IRS is paying very close attention to this area.

Lots of money or investments in the business

• There are special taxes to prevent you from holding excess money in a corporation or running your personal investments there. The IRS will see this on your balance sheet.

Tax‑motivated transactions

• The IRS is on the lookout for transactions undertaken solely for tax avoidance with no business purpose.


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Individual Audit Data 1

Individual Returns Filed Percentage Audited

2014 2015Total Individual Tax Returns 0.9% 0.8%

TPI < $200,000

• 1040 without Schedule C, E, F, Form 2016 or Earned Income Tax Credit2

• 1040 without Schedule C, F or Earned Income Tax Credit; with Schedule E or Form 2106 3

0.3%

0.7%

0.3%

0.7%

TPI $200,000 < $1 million, non‑business returns 2.2% 1.8%

TPI $1 million or more 7.5% 9.6%

TPI = Total Positive Income

Forms Filed By Self‑employed Individuals (Schedule C) Percentage Audited

2014 2015Sch. C TGR < $25,000 1.0% 0.9%

Sch. C TGR $25,000 < $100,000 1.9% 2.4%

Sch. C TGR $100,000 < $200,000 2.4% 2.5%

Sch. C TGR $200,000 or more 2.1% 2.0%

TGR = Total Gross Receipts; does not include returns with Earned Income Tax Credit.

1 Data is from returns filed in calendar year 2014 and 2015, and is the most current available.

2 Includes individual tax returns filed without a Schedule C (nonfarm sole proprietorship); Schedule E (supplemental income and loss); Schedule F (profit or loss from farming); or Form 2106 (employee business expense).

3 Includes individual tax returns filed with a Schedule E (supplemental income and loss) or Form 2106 (employee business expenses) but without a Schedule C (nonfarm sole proprietorship) or Schedule F (profit or loss from farming).


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Retirement by the Numbers: Employer Plans, IRAs and the Saver’s CreditSaving Opportunities Remain the Same Across Retirement Plans for 2017

Both IRA contribution levels and contribution limits to employer‑sponsored programs are subject to cost of living adjustments (COLAs). IRA contribution levels remained the same from 2016 to 2017. The contribution levels for 401(k)s and other employer‑sponsored programs also remained the same for 2017.

The allowable adjusted gross income (AGI) parameters for IRAs did increase for 2017. Income thresholds for 2017 also increased under the Retirement Savings Contributions Credit, commonly known as the Saver’s Credit, which is a nonrefundable tax credit that allows lower‑ and middle‑income retirement plan participants to use elective contributions to reduce their federal income tax.

Employer‑sponsored Programs

Filing Status Maximum 2017Employee Contribution1 Catch‑up Contributions

401(k), 457 and 403(b) plans $18,000 — pre‑tax dollars (unchanged from 2016)

$6,000 (unchanged from 2016)

SIMPLE plans $12,500 — pre‑tax dollars (unchanged from 2016)


SARSEP2 (Salary Reduction SEP)

$18,000 — pre‑tax dollars (unchanged from 2016)


IRAs3

RetirementVehicle

2017 Maximum Contribution Limits1

Catch‑up Contributions

Adjusted GrossIncome (AGI) Restrictions

Traditional Deductible IRA

$5,500 (same as 2016)

$1,000 (same for 2016)

For active participants in employer provided plan:

Single filers: under $62,000 phasing out completely at $72,000 (under $61,000 phasing out completely at $71,000 for 2016)

Married, filing jointly: under $99,000 phasing out completely at $119,000 (under $98,000 phasing out completely at $118,000 for 2016)


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Traditional Nondeductible IRA

$5,500 (same as 2016)

$1,000 (same for 2016)

N/A

Roth IRA Nondeductible

$5,500 (same as 2016)

$1,000 (same for 2016)

Single filers: under $118,000 phasing out completely at $133,000 (under $117,000 phasing out completely at $132,000 for 2016)

Married, filing jointly: under $186,000 phasing out completely at $196,000 (under $184,000 phasing out completely at $194,000 for 2016)

Retirement Savings Contributions Credit4

Retirement Vehicle

2017 Maximum Credit

Adjusted Gross Income (AGI) Restrictions

IRAs, Roth IRAs, SIMPLE Plans, 401(k)s and other qualified retirement plans

$1,000 for single filers

$2,000 for joint filers

Single filers: $31,000 or less ($30,750 for 2016)

Head of household filers: $46,500 or less ($46,125 for 2016)

Married, filing jointly: $62,000 or less ($61,500 for 2016)

1 Subject to COLAs.

2 SARSEPs must have been established prior to January 1, 1997. The maximum contribution and catch-up amounts are the same as for 401(k), 457 and 403(b) plans.

3 Individuals have generally until the tax filing deadline (April 18, 2017 to make contributions to their IRAs for 2016).

4 Depending on AGI, the Retirement Savings Contribution Credit, commonly referred to as the Saver’s Credit, provides a credit ranging from 10% to 50% with lower income taxpayers being eligible for a higher credit. For example, a married taxpayer filing jointly with an AGI of less than $37,000 making a $2,000 retirement plan contribution in 2017 could be eligible for a 50% credit, or $1,000. By contrast, if that same taxpayer had an AGI between $37,000 and $39,999, would be eligible for a 20% credit, or $400; an AGI between $40,000 and $61,999 would make that same taxpayer eligible for a 10% credit, or $200.


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A Historical Look at Capital Gains Rates

Year

Individuals —Maximum Capital Gains Rates

Corporations — Maximum Capital Gains Rates

1913–1921 same as regular rate same as regular rate

1922–1933 12.5% 12.5%

1934–1935 17.7%* 13.75%

1936–1937 22.5%* 15.0%

1938–1941 15.0% same as regular rate

1942–1951 25.0% 25.0%

1952–1953 26.0% 26.0%

1954 25.0% 26.0%

1955–1967 25.0% 25.0%

1968 26.9% 25.0%

1969 27.5% 25.0%

1970 30.2% 25.0%

1971 32.5% 25.0%

1972–1974 35.0% 25.0%

1975–1977 35.0% 30.0%

1978 33.8% 30.0%

1979 35.0% 30.0%

1980–1981 (June 9) 28.0% 28.0%

1981 (after June 9 )–1986 20.0% 28.0%

1987–1992 28.0% 34.0%

1993–1997 (May 6) 28.0% 35.0%

1997 (after May 6)–2003 (May 5) 20.0% 35.0%

2003 (after May 5)–2012 15.0% 35.0%

2013‑2017 20.0% 35.0%

* Assumes 10-year holding period, 30% of gain recognized (sliding scale for exclusion based on holding period).

Please note: Tax law is complex. While an accurate representation of capital gains rate history, this chart may not reflect various factors (such as excess profit taxes, phase-ins, rates on special categories of gain and AMT) that could have affected capital gains taxes throughout the years.

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A Historical Look at Top Marginal Income Tax RatesNote: For much of tax history, the top rate is figured by adding a surtax rate to a basic rate.

Year Regular Surtax Total Top Rate

1913‑1915 1% 6% 7%

1916 2% 13% 15%

1917 4% 63% 67%

1918‑1921 8% 65% 73%

1922‑1923 8% 50% 58%

1924 6% 40% 46%

1925‑1931 5% 20% 25%

1932‑1933 8% 55% 63%

1934‑1935 4% 59% 63%

1936‑1940 4% 75% 79%

1941 4% 77% 81%

1942‑1943 6% 82% 88%

1944 3% 91% 94%

1945‑1963 3% 88% 91%

1964 3% 74% 77%

1965‑1981 70% 70%

1982‑1986 50% 50%

1987 38.5% 38.5%

1988‑1990* 33% 33%

1991‑1992 31% 31%

1993‑2000 39.6% 39.6%

2001 39.1% 39.1%

2002 38.6% 38.6%

2003‑2012 35% 35%

2013‑2017 39.6% 39.6%

* During 1988–90, tax on top income could not be determined without using a worksheet, but 33% appears to have been the highest rate paid.

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Historical Look at Estate and Gift Tax RatesMaximum Estate Tax Rates (1916–2017)

In effect from September 9, 1916, to March 2, 1917 10% of net estate in excess of $5 million

In effect from March 3, 1917, to October 3, 1917 15% of net estate in excess of $5 million

In effect from October 4, 1917, to 6:55 p.m. EST, February 24, 1919

Basic estate tax of 15% of net estate in excess of $5 million plus war estate tax of 10% of net estate tax in excess of $10 million

In effect from 6:55 p.m. EST, February 24, 1919, to 10:25 a.m. EST, February 26, 1926

25% of net estate in excess of $10 million

In effect after 10:25 a.m. EST, February 26, 1926, to 5 p.m. EST, June 6, 1932

20% of net estate in excess of $50 million1

In effect from 5 p.m. EST, June 6, 1932, to May 10, 1934

45% of net estate in excess of $50 million1

In effect from May 11, 1934, to August 30, 1935 60% of net estate in excess of $50 million1

In effect from August 31, 1935, to June 25, 1940 70% of net estate in excess of $50 million1

Estates of decedents dying after June 25, 1940, but before September 21, 1941

70% of excess of net estate over $10 million1 plus a defense tax of 10% of the total tax computed under the basic and additional estate taxes (in effect, maximum tax was 77%)

Estates of decedents dying after September 20, 1941, but before August 17, 1954

77% of excess of net estate over $10 million1

Estates of decedents dying after August 16, 1954, but before 1977

77% of excess over $10 million

Estates of decedents dying after 1976 but before 1982


Estates of decedents dying in 1982 65% of excess over $4 million

Estates of decedents dying in 1983 60% of excess over $3.5 million

Estates of decedents dying after 1983 and before 1988


Estates of decedents dying after 1987 and before 1998

55% of excess over $3 million (effectively 60% for estates in excess of $10 million but less than $21,040,000 because of a surtax to phase out benefits of the graduated rates and unified credit)

Estates of decedents dying in 1998 through 2001 55% of excess over $3 million (effectively 60% for estates in excess of $10 million but less than $17,184,000 because of surtax to phase out benefits of only the graduated rates)

Estates of decedents dying in 2002 50% of excess over $ 2.5 million2



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Estates of decedents dying in 2007 and 2008 45% of excess over $2 million3

Estates of decedents dying in 2009 45% of excess over $3.5 million

Estates of decedents dying in 2010 35% of excess over $5 million and stepped‑up basis for inherited assets, or election for no estate tax, but carryover basis for inherited assets4

Estates of decedents dying in 2011 35% of excess over $5 million5

Estates of decedents dying in 2012 35% of excess over $5,120,000 (as adjusted for inflation) 5





Estates of decedents dying in 2017 and later 40% of excess over $5,490,000 (as adjusted for inflation) 6

For Estate Taxes:1 Estate tax was composed of a basic estate tax plus an additional estate tax; in effect, estates never paid more

than the amount of the additional estate tax.

2 Beginning in 2002, the surtax on estates in excess of $10 million is repealed. In addition, the maximum estate tax rate began to decrease, while the applicable exclusion amount for estate tax purposes (i.e., the lifetime amount shielded from estate tax) began to increase. During the years 2002 through 2009, the estate tax applicable exclusion amount was $1 million in 2002 and 2003, $1.5 million in 2004 and 2005, $2 million in 2006 through 2008, and $3.5 million in 2009.

3 Although the estate tax rate schedule for 2007 through 2009 (Code Sec. 2001) shows the 45% rate being imposed on estates in excess of $1.5 million, the estate tax applicable exclusion amount effectively precludes taxation of any transfers in an amount below $2 million in 2006 through 2008 and $3.5 million in 2009.

4 The Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010, reinstated the estate tax effective for decedents dying after December 31, 2009. However, the Tax Relief Act of 2010 also provided an election for the estates of decedents dying in 2010 to use the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) rules of no estate tax, but a carryover basis for inherited assets. Accordingly, few estates of decedents dying in 2010 will actually be subject to the estate tax. In addition, although the estate tax rate schedule for 2010 through 2012 (Code Sec. 2001) shows the 35% rate being imposed on estates in excess of $500,000, the estate tax applicable exclusion amount effectively precludes taxation of any transfers in an amount below $5 million in 2010 and 2011, and $5,120,000 in 2012.

5 Beginning in 2011, the Tax Relief Act of 2010 allows a surviving spouse to utilize the unused portion of the applicable exclusion amount (as otherwise increased under the Act) of his or her last predeceased spouse. An election by the predeceased spouse’s estate is required.

6 The Tax Relief Act of 2010 reinstated the estate tax at a lower rate and a higher exclusion amount than would have been the case if the sunset called for under EGTRRA had occurred. However, the Tax Relief Act of 2010 was only to apply to estates through 2012. It was scheduled to sunset in 2013, leaving the law as if EGTRRA and the Tax Relief Act of 2010 had never been passed. The American Taxpayer Relief Act of 2012 struck the sunset provisions of EGTRRA and the 2010 Tax Relief Act, thus making the changes enacted by those laws permanent. The 2012 American Taxpayer Relief Act also raised the maximum estate tax rate to 40%. Although the estate tax rate schedule for 2013 and beyond (Code Sec. 2001) shows the 40% rate being imposed on estates in excess of $1,000,000, the applicable exclusion amount effectively precludes taxation of any transfers in an amount below $5,490,000 in 2017 (it was $5,450,000 in 2016, $5,430,000 in 2015, $5,340,000 in 2014, and $5,250,000 in 2013).

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Maximum Gift Tax Rates (1924–2017)1924‑1925 40% on transfers in excess of $10 million over the course of the donor’s lifetime

1926–June 6, 1932 No gift tax imposed (repealed by the Revenue Act of 1926)

June 7, 1932‑1934 33.5% on transfers in excess of $10 million over the course of the donor’s lifetime

1935 45% on transfers in excess of $10 million over the course of the donor’s lifetime

1936‑1940 52.5% on transfers in excess of $50 million over the course of donor’s lifetime

1941 52.5% on transfers in excess of $50 million over the course of the donor’s lifetime, plus a defense tax of 10% of the total tax computed (in effect, maximum tax was 57.75%)

1942‑1976 57.75% on transfers in excess of $10 million over the course of the donor’s lifetime

1977‑1981 70% of transfers in excess of $5 million over the course of the donor’s lifetime

1982 65% of transfers in excess of $4 million over the course of the donor’s lifetime

1983 60% of transfers in excess of $3.5 million over the course of the donor’s lifetime

1984‑1987 55% of transfers in excess of $3 million over the course of the donor’s lifetime

1988‑1997 55% of transfers in excess of $3 million over the course of the donor’s lifetime (effectively 60% for transfers in excess of $10 million but less than $21,040,000 because of a surtax to phase out the benefits of the graduated rates and unified credit)

1998‑2001 55% of transfers in excess of $3 million over the course of the donor’s lifetime (effectively 60% for transfers in excess of $10 million but less than $17,184,000, because of a surtax to phase out the benefits of only the graduated rates)

2002 50% of transfers in excess of $ 2.5 million over the course of the donor’s lifetime


2004 48% of transfers in excess of $2 million over the course of the donor’s lifetime1



2007‑2009 45% of transfers in excess of $1.5 million over the course of the donor’s lifetime



2012 35% of transfers in excess of $5,120,000 (as adjusted for inflation) over the course of the donor’s lifetime3






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For Gift Taxes:1 Beginning in 2004, the applicable exclusion amount for gift tax purposes (i.e., the lifetime amount shielded

from gift tax) differed from the amount used for estate tax purposes. During the years 2002 through 2010, the gift tax applicable exclusion amount remained constant at $1 million, while the estate tax applicable exclusion amount was $1 million in 2002 and 2003, $1.5 million in 2004 and 2005, $2 million in 2006 through 2008 and $3.5 million in 2009.

2 Although the gift tax rate schedule for the years 2010 through 2012 (Code Sec. 2502) shows the 35% rate being imposed on transfers in excess of $500,000, the gift tax applicable exclusion amount effectively precludes taxation of any transfers in an amount below $1 million in 2010, $5 million in 2011, and $5,120,000 in 2012.

3 Beginning in 2011, the Tax Relief Act of 2010 allows a surviving spouse to utilize the unused portion of the applicable exclusion amount (as otherwise increased under the Act) of his or her last predeceased spouse. An election by the predeceased spouse’s estate is required.

4 The Tax Relief Act of 2010 lowered the top tax rate and increased the exclusion amount to $5 million compared to what would have been the case if the transfer tax provisions of EGTRRA had been allowed to sunset as planned. However, the Tax Relief Act of 2010 was only to apply to gift taxes through 2012. It was scheduled to sunset in 2013, leaving the law as if EGTRRA and the Tax Relief Act of 2010 had never been passed. The American Taxpayer Relief Act of 2012 struck the sunset provisions of EGTRRA and the 2010 Tax Relief Act, thus making the changes enacted by those laws permanent. The 2012 Taxpayer Relief Act also raised the maximum gift tax rate to 40%. Although the gift tax rate schedule for 2013 and beyond (Code Sec. 2502 by reference to Code Sec. 2001) shows the 40% rate being imposed on gifts in excess of $1,000,000, the applicable exclusion amount effectively precludes taxation of any transfers in an amount below $5,490,000 in 2017, (it was $5,450,000 in 2016, $5,430,000 in 2015, $5,340,000 in 2014, and $5,250,000 in 2013).

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Helpful Resources for ReportersThe following are recommended complimentary resources from Wolters Kluwer Tax & Accounting that you may find helpful.

• Top Federal Tax Issues for 2017 https://www.cchgroup.com/media/wk/taa/pdfs/training‑and‑support/testing‑center/top‑federal‑tax‑issues‑2017.pdf

• TAX BRIEFING: 2016 Tax Year‑in‑Review https://www.cchgroup.com/media/wk/taa/pdfs/news‑and‑insights/federal‑tax‑legislation/2016‑tax‑year‑in‑review.pdf

• TAX BRIEFING: Post‑election Tax Policy Update https://www.cchgroup.com/media/wk/taa/pdfs/news‑and‑insights/federal‑tax‑legislation/2016‑post‑election‑tax‑policy‑update.pdf

• TAX BRIEFING: 2016 Affordable Care Act Update https://www.cchgroup.com/media/wk/taa/pdfs/news‑and‑insights/federal‑tax‑legislation/2016‑affordable‑care‑act‑update.pdf

• TAX BRIEFING: 2016 Repair/Capitalization/Depreciation Filing Update https://www.cchgroup.com/media/wk/taa/pdfs/news‑and‑insights/federal‑tax‑legislation/2016‑repairs‑capitalization‑depreciation‑filing‑update.pdf

• INFOGRAPHIC: The Wide World of International Taxation https://www.cchgroup.com/media/wk/taa/pdfs/landing‑pages/international_infographic_final.pdf

Throughout the year, you can find informative Tax Briefings from Wolters Kluwer available online at CCHGroup.com/Legislation/Briefings.

Make sure to visit the 2017 Whole Ball of Tax site (CCHGroup.com/WBOT2017) often as new resources and other updates will be posted throughout the tax season.

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https://www.cchgroup.com/media/wk/taa/pdfs/training-and-support/testing-center/top-federal-tax-issue

https://www.cchgroup.com/media/wk/taa/pdfs/training-and-support/testing-center/top-federal-tax-issue

https://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/2016-tax-year-i

https://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/2016-tax-year-i

https://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/2016-post-elect

https://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/2016-post-elect

https://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/2016-affordable

https://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/2016-affordable

https://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/2016-repairs-ca

https://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/2016-repairs-ca

https://www.cchgroup.com/media/wk/taa/pdfs/landing-pages/international_infographic_final.pdf

http://CCHGroup.com/Legislation/Briefings

http://CCHGroup.com/WBOT2017

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